UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-Q

☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

2023
OR
☐
OR

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to      

Commission File Number:
001-14649

LOGO

Trex Company, Inc.

(Exact name of registrant as specified in its charter)

Delaware
 
54-1910453

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

160 Exeter Drive

2500 Trex Way
Winchester, Virginia

 22603-8605
22601
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:
(540) 542-6300

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock
TREX
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.:

Large accelerated filer ☒  Accelerated filer ☐
Non-accelerated filer ☐  Smaller reporting company ☐
   Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.Act ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule
12b-2
of the Exchange Act): Yes ☐ No ☒

The number of shares of the registrant’s common stock, par value $.01$0.01 per share, outstanding at October 17, 201716, 2023 was 29,424,889108,595,381 shares.

TREX COMPANY, INC.

INDEX

 

     

Page

 

PART I FINANCIAL INFORMATION

  2

Item 1.

Condensed Consolidated Financial Statements

   2 

Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months

Ended September 30, 20172023 and 2016September 30, 2022 (unaudited)

   2 

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited)2023 and December 31, 20162022 (unaudited)

   3 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2023 and September 30, 2022 (unaudited)

4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20172023 and

2016 September 30, 2022 (unaudited)

   45 

Notes to Condensed Consolidated Financial Statements (unaudited)

   56 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   1718 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

   2630

Item 4.

Controls and Procedures

30 

Item 4.    Controls and ProceduresPART II OTHER INFORMATION

  2631

PART II OTHER INFORMATIONItem 1.

 27

Item 1.    Legal Proceedings

   2731 

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

   2731 

Item 5.

Other Information

   2731 

Item 6.

Exhibits

   2832 

1

PART I

FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

TREX COMPANY, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands, except share and per share data)

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
   2017   2016   2017   2016 

Net sales

  $140,194   $106,168   $442,941   $384,294 

Cost of sales

   84,910    76,223    250,473    235,312 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   55,284    29,945    192,468    148,982 

Selling, general and administrative expenses

   24,919    19,379    75,409    64,786 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   30,365    10,566    117,059    84,196 

Interest expense, net

   59    77    515    1,108 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   30,306    10,489    116,544    83,088 

Provision for income taxes

   10,208    2,702    39,715    27,871 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $20,098   $7,787   $76,829   $55,217 
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

  $0.68   $0.27   $2.61   $1.88 
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

   29,404,049    29,295,284    29,385,722    29,419,958 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

  $0.68   $0.26   $2.60   $1.86 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

   29,578,216    29,516,718    29,563,497    29,635,796 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $20,098   $7,787   $76,829   $55,217 
  

 

 

   

 

 

   

 

 

   

 

 

 

   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2023
  
2022
   
2023
   
2022
 
Net sales
  $303,836  $188,472   $899,092   $913,950 
Cost of sales
   172,941   142,264    517,321    575,452 
  
 
 
  
 
 
   
 
 
   
 
 
 
Gross profit
   130,895   46,208    381,771    338,498 
Selling, general and administrative expenses
   44,532   26,857    133,694    106,387 
  
 
 
  
 
 
   
 
 
   
 
 
 
Income from operations
   86,363   19,351    248,077    232,111 
Interest (income) expense, net
   (734)   —     2,555    (103) 
  
 
 
  
 
 
   
 
 
   
 
 
 
Income before income taxes
   87,097   19,351    245,522    232,214 
Provision for income taxes
   21,831   4,928    62,089    57,665 
  
 
 
  
 
 
   
 
 
   
 
 
 
Net income
  $65,266  $14,423   $183,433   $174,549 
  
 
 
  
 
 
   
 
 
   
 
 
 
Basic earnings per common share
  $0.60  $0.13   $1.69   $1.55 
  
 
 
  
 
 
   
 
 
   
 
 
 
Basic weighted average common shares outstanding
   108,583,009   110,140,496    108,707,699    112,609,684 
  
 
 
  
 
 
   
 
 
   
 
 
 
Diluted earnings per common share
  $0.60  $0.13   $1.69   $1.55 
  
 
 
  
 
 
   
 
 
   
 
 
 
Diluted weighted average common shares outstanding
   108,702,495   110,300,017    108,829,374    112,787,994 
  
 
 
  
 
 
   
 
 
   
 
 
 
Comprehensive income
  $65,266  $14,423   $183,433   $174,549 
  
 
 
  
 
 
   
 
 
   
 
 
 
See Notes to Condensed Consolidated Financial Statements (Unaudited).

2
Table of Contents
TREX COMPANY, INC.

Condensed Consolidated Balance Sheets

(In thousands)

   September 30,
2017		  December 31,
2016		 
   (Unaudited)    

Assets

   

Current assets:

   

Cash and cash equivalents

  $25,541  $18,664 

Accounts receivable, net

   70,802   48,039 

Contract retainage

   1,893   — 

Inventories

   26,029   28,546 

Prepaid expenses and other assets

   3,912   10,400 

Revenues in excess of billings

   4,706   — 
  

 

 

  

 

 

 

Total current assets

   132,883   105,649 

Property, plant and equipment, net

   102,788   103,286 

Goodwill and other intangibles

   72,544   10,523 

Other assets

   2,981   1,972 
  

 

 

  

 

 

 

Total assets

  $311,196  $221,430 
  

 

 

  

 

 

 

Liabilities and Stockholders’ Equity

   

Current liabilities:

   

Accounts payable

  $15,960  $10,767 

Accrued expenses and other liabilities

   41,327   34,693 

Accrued warranty

   6,725   5,925 

Billings in excess of revenues

   1,353   — 

Customer deposits

   953   — 
  

 

 

  

 

 

 

Total current liabilities

   66,318   51,385 

Deferred income taxes

   894   894 

Non-current accrued warranty

   29,733   31,767 

Other long-term liabilities

   2,676   3,223 
  

 

 

  

 

 

 

Total liabilities

   99,621   87,269 
  

 

 

  

 

 

 

Commitments and contingencies

   —   — 

Stockholders’ equity:

   

Preferred stock, $0.01 par value, 3,000,000 shares authorized; none issued and outstanding

   —   — 

Common stock, $0.01 par value, 80,000,000 shares authorized; 34,918,427 and 34,894,233 shares issued and 29,424,746 and 29,400,552 shares outstanding at September 30, 2017 and December 31, 2016, respectively

   349   349 

Additionalpaid-in capital

   120,667   120,082 

Retained earnings

   264,071   187,242 

Treasury stock, at cost, 5,493,681 shares at September 30, 2017 and December 31, 2016

   (173,512)   (173,512) 
  

 

 

  

 

 

 

Total stockholders’ equity

   211,575   134,161 
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $311,196  $221,430 
  

 

 

  

 

 

 

thousands, except share data)

   
September 30,

2023
  
December 31,
2022
 
        
   
(Unaudited)
 
ASSETS
   
Current assets
   
Cash and cash equivalents  $4,644  $12,325 
Accounts receivable, net   200,909   98,057 
Inventories   60,384   141,355 
Prepaid expenses and other assets   7,130   35,105 
         
Total current assets
   273,067   286,842 
Property, plant and equipment, net   671,035   589,892 
Operating lease assets   27,286   30,991 
Goodwill and other intangible assets, net   18,267   18,582 
Other assets   7,157   7,398 
         
Total assets
  
$
996,812
 
 
$
933,705
 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
   
Current liabilities
   
Accounts payable  $31,795  $19,935 
Accrued expenses and other liabilities   88,919   44,064 
Accrued warranty   5,092   4,600 
Line of credit   56,500   222,000 
         
Total current liabilities
   182,306   290,599 
Deferred income taxes   68,224   68,224 
Operating lease liabilities   20,197   23,974 
Non-current
accrued warranty
   17,874   20,999 
Other long-term liabilities   16,560   11,560 
         
Total liabilities
   305,161   415,356 
         
Commitments and contingencies   —    —  
Stockholders’ equity
   
Preferred stock, $0.01 par value, 3,000,000 shares authorized; none issued and outstanding   —    —  
Common stock, $0.01 par value, 360,000,000 shares authorized; 140,958,411 and 140,841,833 shares issued and 108,595,105 and 108,743,423 share outstanding, at September 30, 2023 and December 31, 2022, respectively   1,410   1,408 
Additional
paid-in
capital
   137,088   131,539 
Retained earnings   1,314,107   1,130,674 
Treasury stock, at cost, 32,363,306 shares at September 30, 2023 and 32,098,410 shares at December 31, 2022   (760,954)   (745,272) 
         
Total stockholders’ equity
   691,651   518,349 
         
Total liabilities and stockholders’ equity
  
$
996,812
 
 
$
933,705
 
         
See Notes to Condensed Consolidated Financial Statements (Unaudited).

3
Table of Contents
TREX COMPANY, INC.

Condensed Consolidated Statements of Cash Flows

Changes in Stockholders’ Equity

(Unaudited)

(In thousands)

   Nine Months Ended
September 30,		 
   2017  2016 

Operating Activities

   

Net income

  $76,829  $55,217 

Adjustments to reconcile net income to net cash provided by operating activities:

   

Depreciation and amortization

   12,065   10,893 

Stock-based compensation

   3,913   3,806 

Loss (gain) on disposal of property, plant and equipment

   1,720   (189) 

Othernon-cash adjustments

   (405)   (285) 

Changes in operating assets and liabilities:

   

Accounts receivable

   (14,407)   1,580 

Contract retainage

   55   — 

Inventories

   4,860   6,597 

Prepaid expenses and other assets

   2,987   (771) 

Revenues in excess of billings

   (1,243)   — 

Accounts payable

   1,203   (6,761) 

Accrued expenses and other liabilities

   (1,430)   5,005 

Billings in excess of revenues

   (399)   — 

Customer deposits

   (609)   — 

Income taxes receivable/payable

   7,698   8,487 
  

 

 

  

 

 

 

Net cash provided by operating activities

   92,837   83,579 
  

 

 

  

 

 

 

Investing Activities

   

Expenditures for property, plant and equipment

   (11,108)   (8,534) 

Proceeds from sales of property, plant and equipment

   —   4,349 

Acquisition of business

   (71,523)   — 
  

 

 

  

 

 

 

Net cash used in investing activities

   (82,631)   (4,185) 
  

 

 

  

 

 

 

Financing Activities

   

Borrowings under line of credit

   201,000   242,700 

Principal payments under line of credit

   (201,000)   (249,700) 

Repurchases of common stock

   (3,617)   (55,185) 

Financing costs

   —   (485) 

Proceeds from employee stock purchase and option plans

   288   218 
  

 

 

  

 

 

 

Net cash used in financing activities

   (3,329)   (62,452) 
  

 

 

  

 

 

 

Net increase in cash and cash equivalents

   6,877   16,942 

Cash and cash equivalents, beginning of period

   18,664   5,995 
  

 

 

  

 

 

 

Cash and cash equivalents, end of period

  $25,541  $22,937 
  

 

 

  

 

 

 

Supplemental Disclosure:

   

Cash paid for interest

  $416  $849 

Cash paid for income taxes, net

  $32,016  $19,435 

thousands, except share data)

   
Common Stock
   
Additional
Paid-In

Capital
  
Retained
Earnings
   
Treasury Stock
  
Total
 
   
Shares
  
Amount
   
Shares
   
Amount
 
Balance, December 31, 2022
  
 
108,743,423
 
 
$
1,408
 
  
$
131,539
 
 
$
1,130,674
 
  
 
32,098,410
 
  
$
(745,272
) 
 
$
518,349
 
Net income   —    —     —    41,131    —     —    41,131 
Employee stock plans   8,504   —     316   —     —     —    316 
Shares withheld for taxes on awards   (28,773)   —     (1,592)   —     —     —    (1,592) 
Stock-based compensation   80,362   1    1,972   —     —     —    1,973 
                                
Balance, March 31, 2023
  
 
108,803,516
 
 
$
1,409
 
  
$
132,235
 
 
$
1,171,805
 
  
 
32,098,410
 
  
$
(745,272
) 
 
$
560,177
 
Net income   —    —     —    77,036    —     —    77,036 
Employee stock plans   7,971   —     323   —     —     —    323 
Shares withheld for taxes on awards   (15,663)   —     (855)   —     —     —    (855) 
Stock-based compensation   36,888   —     2,590   —     —     —    2,590 
Repurchases of common stock   (264,896)   —     —    —     264,896    (15,746)   (15,746) 
                                
Balance, June 30, 2023
  
 
108,567,816
 
 
$
1,409
 
  
$
134,293
 
 
$
1,248,841
 
  
 
32,363,306
 
  
$
(761,018
) 
 
$
623,525
 
Net Income   —    —     —    65,266   —     —    65,266 
Employee stock plans   5,448   —     286   —     —     —    286 
Shares withheld for taxes on awards   (4,140)   —     (312)   —     —     —    (312) 
Stock-based compensation   25,981   1   2,821   —     —     —    2,822 
Repurchases of common stock   —    —     —    —     —     64   64 
                                
Balance, September 30, 2023
  
 
108,595,105
 
 
$
1,410
 
  
$
137,088
 
 
$
1,314,107
 
  
 
32,363,306
 
  
$
(760,954
) 
 
$
691,651
 
                                
   
Common Stock
   
Additional
Paid-In

Capital
  
Retained
Earnings
   
Treasury Stock
  
Total
 
   
Shares
  
Amount
   
Shares
   
Amount
 
Balance, December 31, 2021
  
 
115,148,152
 
 
$
1,407
 
  
$
127,787
 
 
$
946,048
 
  
 
25,586,601
 
  
$
(350,208
) 
 
$
725,034
 
Net income   —    —     —    71,211    —     —    71,211 
Employee stock plans   9,081   —     523   —     —     —    523 
Shares withheld for taxes on awards   (35,856)   —     (2,912)   —     —     —    (2,912) 
Stock-based compensation   79,926   1    2,225   —     —     —    2,226 
Repurchases of common stock   (833,963)   —     —    —     833,963    (75,017)   (75,017) 
                                
Balance, March 31, 2022
  
 
114,367,340
 
 
$
1,408
 
  
$
127,623
 
 
$
1,017,259
 
  
 
26,420,564
 
  
$
(425,225
) 
 
$
721,065
 
Net income   —    —     —    88,916    —     —    88,916 
Employee stock plans   8,834   —     429   —     —     —    429 
Stock-based compensation   2,024   —     1,057   —     —     —    1,057 
Repurchases of common stock   (2,814,817)   —     —    —     2,814,817    (169,992)   (169,992) 
                                
Balance, June 30, 2022
  
 
111,563,381
 
 
$
1,408
 
  
$
129,109
 
 
$
1,106,175
 
  
 
29,235,381
 
  
$
(595,217
) 
 
$
641,475
 
Net income   —    —     —    14,423    —     —    14,423 
Employee stock plans   11,003   —     429   —     —     —    429 
Shares withheld for taxes on awards   (57)   —     (3)   —     —     —    (3) 
Stock-based compensation   10,520   —     249   —     —     —    249 
Repurchases of common stock   (1,710,676)   —     —    —     1,710,676    (100,035)   (100,035) 
                                
Balance, September 30, 2022
  
 
109,874,171
 
 
$
1,408
 
  
$
129,784
 
 
$
1,120,598
 
  
 
30,946,057
 
  
$
(695,252
) 
 
$
556,538
 
                                
See Notes to Condensed Consolidated Financial Statements (Unaudited).

4
Table of Contents
TREX COMPANY, INC.

Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
   
Nine Months Ended
September 30,
 
   
2023
  
2022
 
OPERATING ACTIVITIES
   
Net income  $183,433  $174,549 
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization   37,194   33,269 
Stock-based compensation   7,384   3,531 
Loss (gain) on disposal of property, plant and equipment   1,081   (43) 
Other
non-cash
adjustments
   (169)   (171) 
Changes in operating assets and liabilities:   
Accounts receivable   (102,852)   62,343 
Inventories   80,971   (48,362) 
Prepaid expenses and other assets   4,376   7,125 
Accounts payable   10,678   (3,769) 
Accrued expenses and other liabilities   39,039   8,842 
Income taxes receivable/payable   27,090   7,079 
         
Net cash provided by operating activities
  
 
288,225
 
 
 
244,393
 
         
INVESTING ACTIVITIES
   
Expenditures for property, plant and equipment   (112,920)   (108,163) 
Proceeds from sales of property, plant and equipment   —    45 
         
Net cash used in investing activities
  
 
(112,920
) 
 
 
(108,118
) 
         
FINANCING ACTIVITIES
   
Borrowings under line of credit   509,500   156,000
Principal payments under line of credit   (675,000)   (80,000) 
Repurchases of common stock   (18,441)   (347,957) 
Proceeds from employee stock purchase and option plans   925   1,381 
Financing costs   30   (867) 
         
Net cash used in financing activities
  
 
(182,986
) 
 
 
(271,443
) 
         
Net decrease in cash and cash equivalents
  
 
(7,681
) 
 
 
(135,168
) 
Cash and cash equivalents, beginning of period   12,325   141,053 
         
Cash and cash equivalents, end of period
  
$
4,644
 
 
$
5,885
 
         
Supplemental Disclosure:   
Cash paid for interest, net of capitalized interest  $4,165  $—  
Cash paid for income taxes, net  $35,106  $50,585 
Supplemental
non-cash
investing and financing disclosure:
   
Capital expenditures in accounts payable  $1,183  $787 
See Notes to Condensed Consolidated Financial Statements

(Unaudited).

5
Table of Contents
TREX COMPANY, INC.
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 20172023 and 2016

September 30, 2022

(Unaudited)

1.
BUSINESS AND ORGANIZATION

Trex Company, Inc. (Company)(Trex, Company), a Delaware corporation, was incorporated on September 4, 1998. As of December 30, 2022, the Company operates in one reportable segment, Trex Residential Products (Trex Residential). Through December 30, 2022, Trex had one wholly-owned subsidiary, Trex Commercial Products, Inc. (Trex Commercial) and operated in two reportable segments, Trex Residential and Trex Commercial.
Trex Residential, the Company’s principal business based on net sales, is the world’s largest manufacturer of high-performance,
low-maintenance
wood-alternative decking and residential railing and outdoor living products with more than 25 years of product experience which areand accessories, marketed under the brand name Trex
®. The Company manufactures and distributes high-performance,low-maintenance wood/plastic composite outdoor living products and related accessories.
, with more than 30 years of product experience. A majority of its products are manufactured in a proprietary process that combines reclaimed wood fibers and scrap polyethylene. On July 31, 2017, through its newly-formed, wholly-owned subsidiary, Trex Commercial Products, Inc., the Company acquired certain assets and assumed certain liabilities of Staging Concepts Acquisition, LLC (SC Company) and thus expanded its markets to also become a market leader for the design, engineering and marketing of modular and architectural railing systems and solutions for the commercial and multifamily markets, and a leading provider of staging, acoustical and seating systems for commercial markets, including sports stadiums and performing arts venues. Additional information on the acquisition of SC Company is presented in Note 6. The Company is incorporated in Delaware. The principal executive offices are located at 160 Exeter Drive,2500 Trex Way, Winchester, Virginia 22603,22601, and the telephone number at that address is
(540) 542-6300. Subsequent to the acquisition, the Company operates in two reportable segments, Trex Residential Products and Trex Commercial Products.

2.
BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form
10-Q
and Article 10 of Regulation
S-X
and, accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotesnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments, except as otherwise described herein) considered necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements.

Certain reclassifications have been made to prior period balances to conform to current year presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Trex Wood-Polymer Espana, S.L, for all periods presented. Intercompany accounts and transactions have been eliminated in consolidation.

The Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Cash Flows of the Company include the operations and cash flows of Trex Commercial Products, Inc., its newly-formed, wholly-owned subsidiary, from July 31, 2017 through September 30, 2017. The Company’s Condensed Consolidated Balance Sheet includes the assets and liabilities of Trex Commercial Products, Inc. at September 30, 2017. Trex Commercial Products, Inc. was formed to acquire certain assets and assume certain liabilities of SC Company on July 31, 2017. Additional information on the acquisition of SC Company is presented in Note 6.

Theunaudited consolidated results of operations for the three and nine months ended September 30, 20172023, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. 2023. The Company’s results of operations are affected by a number of factors, including, but not limited to, the cost to manufacture and distribute products, cost of raw materials, inflation, consumer spending and preferences, interest rates, the impact of any supply chain disruptions, economic conditions, and/or any adverse effects from global health pandemics and geopolitical conflicts. Towards the end of June 2022, the Company experienced a reduction in demand from its distribution partners, which the Company believed was primarily spurred by concerns over a potential easing in consumer demand due to rising interest rates, declining consumer sentiment and expectations of a general slowing in the economy. As a result, beginning in the third quarter of 2022 the Company’s channel partners met demand partially through inventory drawdown rather than reordering products and maintaining current inventories. This inventory recalibration was completed by year end.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 20162022, and 2015December 31, 2021, and for each of the three years in the period ended December 31, 20162022, included in the Annual Report of Trex Company, Inc. on Form
10-K,
as filed with the U.S. Securities and Exchange Commission.

3.
SIGNIFICANT ACCOUNTING POLICIES
SALE OF TREX COMMERCIAL PRODUCTS, INC.

In addition

On December 30, 2022, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiary and reportable segment, Trex Commercial. The divestiture reflected the Company’s decision to focus on driving the critical accounting policies includedmost profitable growth strategy for the Company and its shareholders through the execution of its outdoor living strategy. The divestiture did not represent a strategic shift with a major effect on the Company’s operations. The results of operations of Trex Commercial are consolidated in the Company’s Annual Report on Form10-Kresults of operations for the yearthree months and nine months ended December 31, 2016, the Company’s critical accounting policies also currently include the following policies implemented subsequent to and in connection with the SC Company acquisition:

Revenue Recognition

For Trex Commercial Products, the Company recognizes revenue using the percentageSeptember 30, 2022.

6
Table of completion method measured by the ratio of direct costs incurred to date to estimated total costs for each contract. Contract costs include all direct material, labor, subcontract and certain indirect costs. Administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are recognized when such losses are determined. Changes in job performance, conditions and estimated profitability may result in revisions to costs and income and are recognized in the period they are determined. Revenues recognized in excess of amounts billed are classified under current assets. Billings in excess of revenues are classified under current liabilities.

Concentrations and Credit Risk

In addition to its trade receivables, the Company assesses the credit risk exposure of its customers’ contracts receivable by considering the length of time receivables may be past due, the customer’s financial condition and ability to repay the obligation, historical and expected credit loss experience, and other factors. Contracts receivable are carried at the original invoice amount in accounts receivable in the Company’s Condensed Consolidated Balance Sheet and are generally due when billed, and contract retainage is generally due at the completion of the construction contract.

Contents
4.
RECENTLY ADOPTED ACCOUNTING STANDARDSTANDARDS

In March 2016,December 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2016-09,2022-06
“Compensation – Stock CompensationReference Rate Reform (Topic 718)848):Improvements to Employee Share-Based Payment Accounting. Deferral of the Sunset Date of Topic 848.” The standard amends certain aspectsamendments in this update defer the sunset date of accounting for employee share-based payment transactions, including the accounting for income taxes related to those transactions and forfeitures. The standard requires recognizing excess tax benefits and deficiencies on share-based awards in the tax provision instead of in equity. Also, the standard requires these amounts to be classified as an operating activity, and shares withheld to satisfy employee taxes to be classified as a financing activity in the statement of cash flows, rather than as currently classified as financing and operating activities, respectively. The standard was effective for annual reporting periods beginning after December 15, 2016 and interim periods within that reporting period, with early adoption permitted. The Company elected to early adopt the standard in fiscal year 2016. The impact of the early adoption resulted in the following:

The standard requires that excess tax benefits of the settlement or vesting of time-based restricted stock or time-based restricted stock units and performance-based restricted stock or performance-based restricted stock units be recorded within income tax expense. Prior to adoption this amount would have been recorded as an increase in additionalpaid-in capital. Additionally, the standard requires that excess tax benefits are now reported as an operating activity in the Company’s Consolidated Statements of Cash Flows, rather than as a financing activity as was previously reported. The Company applied this guidance prospectively as of January 1, 2016 during the quarterly period endedTopic 848 from December 31, 2016, and, accordingly, data previously reported for2022 to December 31, 2024, after which entities will no longer be permitted to apply the three and nine months ended September 30, 2016 have been adjusted, as follows:

   Three Months Ended September 30, 2016 
         As Reported              Adjusted      
   

(in thousands, except share

and per share data)

 

Provision for income taxes

  $3,591   $2,702 

Net Income

  $6,898   $7,787 

Basic net income per share

  $0.24   $0.27 

Diluted net income per share

  $0.23   $0.26 

Diluted weighted average common shares outstanding

   29,457,653    29,516,718 

   Nine Months Ended September 30, 2016 
         As Reported               Adjusted       
   

(in thousands, except share

and per share data)

 

Provision for income taxes

  $29,510   $27,871 

Net Income

  $53,578   $55,217 

Basic net income per share

  $1.82   $1.88 

Diluted net income per share

  $1.81   $1.86 

Diluted weighted average common shares outstanding

   29,581,578    29,635,796 

Cash flows provided by operating activities

  $81,880   $83,579 

Cash flows used in financing activities

  $(60,573)   $(62,452) 

The Company elected to change its policy on accounting for forfeitures and recognize forfeitures as they occur. The Company applied this guidance on a modified retrospective transition method. The Company determined that the cumulative effect of applying the guidance under the modified retrospective transition method was not material to its Consolidated Financial Statements.

The standard requires the presentation of employee taxes as a financing activityrelief in the Consolidated Statements of Cash Flows. This provision did not impact the Company’s Consolidated Financial Statements as the Company previously presented employee taxes as a financing activity in its Consolidated Statements of Cash Flows.

The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share for 2016, which did not materially increase the diluted weighted average common shares outstanding.

5.NEW ACCOUNTING STANDARDS NOT YET ADOPTED

Topic 848. In May 2017,March 2020, the FASB issued ASU

No. 2017-09,2020-04
“Compensation—Stock CompensationReference Rate Reform (Topic 718), Scope Modification Accounting.” The guidance clarified when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value (or calculated intrinsic value, if those amounts are being used to measure the award under ASC 718), the vesting conditions, or the classification848): Facilitation of the award (as equityEffects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU
No. 2020-04
provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (LIBOR) or liability) changes asanother reference rate expected to be discontinued. The FASB included a result of the change in terms or conditions. The guidance is effective prospectively for annual periods beginning on or after December 15, 2017. Early adoption is permitted. The Company intends to adopt the guidancesunset provision within Topic 848 based on the effective date and does not believe adoption will have a material impact on its financial condition or resultsexpectations of operations.

In January 2017,when the FASB issued ASUNo. 2017-04, “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of individual assets and liabilities to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The guidance is to be applied prospectively, and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed on testing dates after January 1, 2017. The Company intends to adopt the guidance on the effective date and does not believe adoption will have a material impact on its financial condition or results of operations.

In August 2016, the FASB issued ASUNo. 2016-15, “Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The guidance isLIBOR would cease being published intended to reduce diversity in practice across all industries in how certain transactions are classified inhelp stakeholders during the statement of cash flows.global market-wide reference rate transition period. The guidance is effective for financial statements issued for fiscal yearsall entities as of March 12, 2020 through December 31, 2024 and can be adopted as of any date from the beginning after December 15, 2017, andof an interim periods within those fiscal years. Early adoptionperiod that includes or is permitted.subsequent to March 12, 2020. The guidance requires application using a retrospective transition method. The Company intends to adopt the guidance on the effective date and doesamendments did not believe adoption will have a material impacteffect on itsthe Company’s consolidated financial statements.

In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842).” The standard requires lessees to recognize leases on the balance sheet as aright-of-use asset and a lease liability, other than leases that meet the definition of a short-term lease. The liability will be equal to the present value of the lease payments. The asset will be based on the liability, subject to adjustment. Currently, under existing U.S. generally accepted accounting standards, the Company does not recognize on the balance sheet aright-of-use asset or lease liability related to its operating leases. For income statement purposes, the leases will continue to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) and finance leases will result in a front-loaded expense pattern (similar to current capital leases). The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The standard must be adopted using the modified retrospective transition method and provides for the option to elect a package of practical expedients upon adoption. The Company intends to adopt the standard in the first quarter of fiscal 2019 and is assessing the impact of adoption of the standard on its consolidated financial statements and related note disclosures. The Company has not made any decision on the option to elect adoption of the practical expedients.

In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606),” and issued subsequent amendments to the initial guidance in August 2015 within ASUNo. 2015-14, in March 2016 within ASUNo. 2016-08, in April 2016 within ASUNo. 2016-10, in May 2016 within ASUNo. 2016-12, and in December 2016 within ASUNo. 2016-20 (collectively, the new standard). The new standard provides a single, comprehensive model for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new standard requires an entity to recognize revenue when it satisfies a performance obligation at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring control of goods or services to a customer. The Company intends to adopt the new standard in the first quarter of fiscal 2018. Currently, the Company intends to use the retrospective application to each reporting period presented, with the option to elect certain practical expedients as defined in the new standard. The Company has substantially completed evaluation of its Trex Residential Products segment and believes that

adoption of the new standard will not have a significant impact on that segment. The Company continues to evaluate the impact of the new standard on its recently acquired Trex Commercial Products segment and expects to complete the evaluation during the fourth quarter of 2017. The Company expects expanded financial statement note disclosure. The Company continues to evaluate the impacts of the pending adoption. As such, the Company’s preliminary assessments are subject to change.

6.
5.
ACQUISITION
INVENTORIES

On July 31, 2017, through its newly-formed, wholly-owned subsidiary, Trex Commercial Products, the Company acquired certain assets and assumed certain liabilities of SC Company for $71.8 million in cash, subject to adjustment pending final determination of working capital at closing. The Company used cash on hand and $30.0 million of funding from its existing revolving credit facility, which was fully paid on August 17, 2017, to acquire the assets. The acquired business designs, engineers and markets modular architectural railing systems and solutions for the commercial and multifamily markets, and provides staging, acoustical and seating systems for commercial markets, including sports stadiums and performing arts venues. As a result of the purchase, the Company gained access to growing commercial markets, expanded its custom design and engineering capabilities, and added the contract architect and specifier communities as new channels for its products.

The acquisition was accounted for using the acquisition method of accounting under U.S. Generally Accepted Accounting Principles, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values of consideration transferred and net assets acquired were determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “Fair Value Measurements and Disclosures.” The Company believes that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. The Company’s consolidated results of operations for the quarterly and nine-month period ended September 30, 2017 include the operating results of the acquired business from the date of acquisition through quarter end. The Company’s consolidated balance sheet at September 30, 2017 includes the acquired assets and any liabilities assumed.

Based on the Company’s preliminary valuation, a total estimated consideration of $71.8 million has been allocated on a preliminary basis to the assets acquired and liabilities assumed, as follows (in thousands). A final determination of the purchase price and adjustment to the fair values of assets acquired and liabilities assumed and finalization of the valuation report will be completed upon the final determination of working capital at closing:

Accounts receivable, net

  $8,357 

Contract retainage

   1,948 

Inventories, net

   2,344 

Prepaid expenses and other assets

   1,223 

Revenues in excess of billings

   3,463 

Fixed assets, net

   1,264 

Intangible assets

   4,900 

Goodwill

   57,938 

Accounts payable

   (3,990) 

Accrued liabilities and other expenses

   (2,329) 

Billings in excess of revenues

   (1,752) 

Customer Deposits

   (1,562) 
  

 

 

 

Total estimated consideration

  $71,804 
  

 

 

 

The preliminary goodwill of $57.9 million is primarily attributable to the potential opportunity for the Company to offer full service railing systems in the growing commercial and multi-family markets, access to a complementary product category with a track record of substantial revenue growth, the ability to achieve economies of scale around raw material procurement, an increase in the range of products the Company may offer its core customers, and intangible assets that do not qualify for separable or legal criterion, such as an assembled workforce. The amount of goodwill that is expected to be amortized and deductible for tax purposes in 2017 is $1.1 million. All of the goodwill was recorded to the Trex Commercial Products reportable segment. The fair value attributed to intangible assets, which consists of production backlog and trade names and trademarks, is being amortized straight line over 12 months and is based on the estimated economics of the assets. The fair value attributed to the intangible assets acquired and goodwill was based on assumptions and other information compiled by management, including independent valuations that utilized established valuation techniques.

From July 31, 2017, through September 31, 2017, Trex Commercial Products generated $9.2 million of revenue and incurred a net loss of $75 thousand. The Company incurred $0.5 million of acquisition-related expenses during the nine months ended September 30, 2017, which are included in selling, general and administrative expense.

The following pro forma results are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the years presented or the results which may occur in the future. The following unaudited pro forma results of operations assume the acquisition occurred on January 1, 2016 (in thousands, except per share amounts):

   Nine Months Ended September 30 
   2017   2016   2017   2016 
   Actual   Pro Forma 

Net sales

  $442,941   $384,294   $475,076   $427,043 

Net income

  $76,829   $55,217   $77,570   $54,978 

Basic earnings per common share

  $2.61   $1.88   $2.64   $1.87 

Diluted earnings per common share

  $2.60   $1.86   $2.62   $1.86 

Significant pro forma adjustments included in the above pro forma information include an adjustment to amortization expense for the intangible assets acquired (see Note 9), elimination of transaction costs related to the acquisition as such costs are considered to benon-recurring in nature, an adjustment to compensation expense related to restricted stock units granted in connection with the acquisition, the income tax effects of the adjustments based on a blended statutory rate of 38.0%, and an adjustment to SC Company’s income taxes to the blended statutory rate, as SC Company was treated as a limited liability company for Federal and state income tax purposes.

7.INVENTORIES

Inventories valued at LIFO(last-in,
(last-in,
first-out),
consist of the following (in thousands):

   September 30,
2017		   December 31,
2016		 

Finished goods

  $23,486   $29,686 

Raw materials

   21,344    20,231 
  

 

 

   

 

 

 

Total FIFO(first-in,first-out) inventories

   44,830    49,917 

Reserve to adjust inventories to LIFO value

   (21,371)    (21,371) 
  

 

 

   

 

 

 

Total LIFO inventories

  $23,459   $28,546 
  

 

 

   

 

 

 

   
September 30,
2023
   
December 31,
2022
 
Finished goods  $43,180   $107,114 
Raw materials   52,255    69,292 
          
Total FIFO
(first-in,
first-out)
inventories
   95,435    176,406 
Reserve to adjust inventories to LIFO value   (35,051)    (35,051) 
          
Total LIFO inventories  $60,384   $141,355 
          
The Company utilizes the LIFO method of accounting related to its Trex Residential wood-alternative decking and residential railing products, which generally provides for the matching of current costs with current revenues. However, under the LIFO method, reductions in annual inventory balances cause a portion of the Company’s cost of sales to be based on historical costs rather than current year costs (LIFO liquidation). Reductions in interim inventory balances expected to be replenished by
year-end
do not result in a LIFO liquidation. Accordingly, interim LIFO calculations are based, in part, on management’s estimates of expected
year-end
inventory levels and costs whichand may differ from actual results. Since inventory levels and costs are subject to factors beyond management’s control, interim results are subject to the final
year-end
LIFO inventory valuation. There were no LIFO inventory liquidations or related impact on cost of sales in
In the nine months ended September 30, 2017 or 2016.

Inventories valued at lower2023, the Company had a reduction in inventory that it does not expect will be replenished by year end. However, the Company estimates that the LIFO liquidation will not have a material impact on cost of sales for the year ended December 31, 2023 and, accordingly, it did not impact the cost (FIFO method) and net realizable value consist of sales for the following (in thousands):

   September 30,
2017		   December 31,
2016		 

Work-in-process

  $580   $— 

Raw materials

   1,990    — 
  

 

 

   

 

 

 

Total FIFO inventories

  $2,570   $— 
  

 

 

   

 

 

 

The Company utilizes the FIFO method of accounting related to its commercial railing and staging products.Work-in-process includes estimated production costs.

nine months ended September 30, 2023.
8.
6.
PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consist of the following (in thousands):

   September 30,
2017		   December 31,
2016		 

Prepaid expenses

  $3,190   $6,209 

Income tax receivable

   —    4,024 

Other

   722    167 
  

 

 

   

 

 

 

Total prepaid expenses and other assets

  $3,912   $10,400 
  

 

 

   

 

 

 

   
September 30,

2023
   
December 31,
2022
 
Prepaid expenses  $ 6,859   $10,787 
Income tax receivable   —     23,979 
Other   271    339 
          
Total prepaid expenses and other assets  $7,130   $35,105 
          
9.
7.
GOODWILL AND OTHER INTANGIBLE ASSETS, NET

The following table summarizes the activity related to the carrying amount of goodwill during the nine months ended September 30, 2017 (in thousands):

   2017 

Beginning balance, January 1

  $10,523 

Goodwill recognized from acquisition of SC Company

   57,938 
  

 

 

 

Ending balance, September 30

  $68,461 
  

 

 

 

Intangible assets acquired from SC Company on July 31, 2017 consist of the following at September 30, 2017:

   
Net Carrying
Amount
(in thousands)		   Amortization
Period		 
       (in months) 

Intangible assets:

    

Customer backlog

  $4,000    12 

Trade names and trademarks

   900    12 
  

 

 

   

Total intangible assets

   4,900   
  

 

 

   

Accumulated amortization:

    

Customer backlog

   (683)   

Trade name

   (134)   
  

 

 

   

Total accumulated amortization

   (817)   
  

 

 

   

Intantible assets, net

  $4,083   
  

 

 

   

2023, and December 31, 2022, was $14.2 million for Trex Residential. The Company’s intangible assets, purchased in 2018, consist of domain names for Trex Residential. At September 30, 2023, and December 31, 2022, intangible assets were $6.3 million and accumulated amortization was $2.2 million and $1.9 million, respectively. Intangible asset amounts were determined based on the

7
Table of Contents
estimated economics of the asset and are amortized over the estimated useful lives on a straight-line bases,basis over 15 years, which approximates the pattern in which the economic benefits are expected to be received. AmortizationThe Company evaluates the recoverability of intangible assets periodically and considers events or circumstances that may warrant revised estimates of useful lives or that may indicate an impairment. Intangible asset amortization expense for the quarterly periodnine months ended September 31, 201730, 2023, and September 30, 2022, was $0.8 million.

$0.3 million and $0.3 million, respectively.

10.
8.
ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following (in thousands):

   September 30,
2017		   December 31,
2016		 

Sales and marketing

  $21,013   $16,707 

Compensation and benefits

   10,727    13,298 

Income taxes

   3,674    — 

Manufacturing costs

   1,215    1,799 

Rent obligations

   739    632 

Other

   3,959    2,257 
  

 

 

   

 

 

 

Total accrued expenses and other liabilities

  $41,327   $34,693 
  

 

 

   

 

 

 

   
September 30,

2023
   
December 31,
2022
 
Sales and marketing  $45,374   $ 19,194 
Compensation and benefits   24,470    8,646 
Operating lease liabilities   7,409    7,488 
Manufacturing costs   3,507    3,425 
Income taxes   3,111    —  
Other   5,048    5,311 
          
Total accrued expenses and other liabilities  $ 88,919   $44,064 
          
11.
9.
DEBT

The Company’s outstanding debt consists of a revolving credit facility.

Revolving Credit Facility

Indebtedness on and after May
 18, 2022 and prior to December
 22, 2022
. On January 12, 2016,May 18, 2022, the Company, entered intoas borrower; Trex Commercial, as guarantor; BOA, as a Third Amended and Restated Credit Agreement, as amended, with Bank of America, N.A. as Lender, Administrative Agent, Swing Line Lender and L/C Issuer; Wells Fargo, as lender and Syndication Agent; Regions Bank, PNC Bank, National Association (PNC), and TD Bank, N.A. (TD)(each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner, entered into a Credit Agreement (Credit Agreement) to amend and restate the Fourth Amended and Restated Credit Agreement dated as of November 5, 2019.
Under the Credit Agreement, the Lenders agreed to provide the Company with one or more Revolving Loans in a collective maximum principal amount of $400,000,000 (Loan Limit) throughout the term, which ends May 18, 2027 (Term). Included within the Loan Limit are sublimits for a Letter of Credit Issuer,facility in an amount not to exceed $60,000,000; and certain other lenders including Citibank, N.A., Capital One, N.A.,Swing Line Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000. The Revolving Loans, the Letter of Credit facility and SunTrust. the Swing Line Loans are for the purpose of raising working capital and supporting general business operations.
The Third Amended Credit Agreement as amended, provides the Company, in the aggregate, the ability to borrow an amount up to the Loan Limit during the Term. The Company is not obligated to borrow any amount under the Loan Limit. Within the Loan Limit, the Company may borrow, repay and reborrow at any time or from time to time while the Notes are in effect. Base Rate Loans (as defined in the Credit Agreement) under the Revolving Loans and the Swing Line Loans accrue interest at the Base Rate plus the Applicable Rate (as defined in the Credit Agreement) and Term SOFR Loans for the Revolving Loans accrue interest at the rate per annum equal to the sum of Term SOFR for such interest period plus the Applicable Rate (as defined in the Credit Agreement). The Base Rate for any day is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by BOA as its prime rate, and (c) the Term SOFR plus 1.0% subject to certain interest rate floors. Repayment of all then outstanding principal, interest, fees and costs is due at the end of the Term.
The Company and BofA Securities as a sustainability coordinator, are entitled to establish specified key performance indicators (KPIs) with respect to certain environmental, social and governance targets of the Company and its subsidiaries. The sustainability coordinator and the Company may amend the Credit Agreement for the purpose of incorporating the KPIs and other related provisions, unless the Lenders object to such amendment on or prior to the date that is ten business days after the date on which such amendment is posted for review by the Lenders. Based on the performance of the Company and its subsidiaries against the KPIs, certain adjustments (increase, decrease or no adjustment) to otherwise applicable pricing will be made; provided that the amount of such adjustments shall not exceed certain aggregate caps as in the definitive loan documentation.
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Under the terms of the Security and Pledge Agreement, the Company and Trex Commercial, subject to certain permitted encumbrances, as collateral security for the above-stated loans and all other present and future indebtedness of the Company owing to the Lenders grants to BOA, as Administrative Agent for the Lenders, a continuing security interest in certain collateral described and defined in the Security and Pledge Agreement but excluding the Excluded Property (as defined in the Security and Pledge Agreement).
Indebtedness On and After December
 22, 2022
. As of December 22, 2022, the Company entered into a First Amendment to the Credit Agreement (First Amendment) by and among the Company, as borrower, the guarantors party thereto; BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; TD as lender and Syndication Agent; Regions Bank, PNC, and Wells Fargo (each, a Lender and collectively, the Lenders), arranged by BofA Securities as Sole Lead Arranger and Sole Bookrunner, amending that certain Credit Agreement dated as of May 18, 2022, by and among the Company, as borrower, the guarantors party thereto, BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer and the other lenders identified therein (as so amended, the “Credit Agreement”). The First Amendment removes Trex Commercial as a guarantor to any and all indebtedness under the Credit Agreement.
As a part of the First Amendment, the Credit Agreement was amended and restated to provide for an additional Revolving B Loan (as hereinafter defined).
Under the First Amendment, the Lenders agreed to provide the Company with a Revolving B Loan consisting of one or more revolving loans in a collective maximum principal amount of $250 million from January 1 through June 30 of each year, and a maximum principal amount of $200 million from July 1 through December 31 of each year$150,000,000 (Revolving B Loan Limit) throughout the term, which ends January 12, 2021.

December 22, 2024 (Revolving B Loan Term). Previously, under the Credit Agreement, there was no Revolving B Loan. The First Amendment also provided that TD would serve as Syndication Agent.

As of December 22, 2022, the Credit Agreement was amended and restated to refer to this loan as the Revolving A Loan. The amended and restated Credit Agreement was made an Exhibit A to the First Amendment. All of the terms of the Credit Agreement apply to the Revolving B Loan. The Credit Agreement continues to include sublimits under the Revolving A Loan for a Letter of Credit facility in an amount not to exceed $60,000,000; and Swing Line Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000. The Revolving Loans, the Letter of Credit facility and the Swing Line Loans under Revolving A Loan are for the purpose of raising working capital and supporting general business operations.
The Notes provide the Company, in the aggregate, the ability to borrow an amount up to the Revolving A Loan Limit during the Revolving A Loan Term and Revolving B Loan Limit during the Revolving B Loan Term. The Company is not obligated to borrow any amount under the revolving loans. Within the respective loan limit, the Company may borrow, repay and reborrow at any time or from time to time while the Notes are in effect. With respect to Revolving B Loans, for any day, the rate per annum is a tiered pricing based upon the Consolidated Debt to Consolidated EBITDA Ratio. The applicable rate for Revolving B Loans that are Base Rate Loans range between 1.20% and 2.15% and the applicable rate for Revolving B Loans that are Term SOFR/Term SOFR Daily Floating Rate range between 0.20% and 1.15%.
The Company had no$56.5 million in borrowings outstanding borrowings under its revolving credit facility and remaining available borrowing capacity of $200$493.5 million at September 30, 2017.

2023. The weighted average interest rate on the revolving credit facility was 6.11% as of September 30, 2023.

Compliance with Debt Covenants and Restrictions

The Company’s ability

Pursuant to make scheduled principal and interest payments, borrow and repay amounts under any outstanding revolving credit facility and continuethe terms of the Credit Agreement, the Company is subject to comply with anycertain loan covenants depends primarily on the Company’s ability to generate sufficient cash flow from operations.

As of September 30, 2017, thecompliance covenants. The Company was in compliance with all covenants as of the covenants contained in its debt agreements.September 30, 2023. Failure to comply with the loanfinancial covenants might cause lenders to accelerate thecould be considered a default of repayment obligations under the credit facility, which may be declared payable immediately based on a default.

and, among other remedies, could accelerate payment of any amounts outstanding.
12.
10.
LEASES
The Company leases office space, storage warehouses, training and manufacturing facilities, and certain plant equipment under various operating leases. The Company’s operating leases have remaining lease terms of 1 year to 6 years. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
For the nine months ended September 30, 2023, and September 30, 2022, total operating lease expense was $6.1 million and $6.3 million, respectively. The weighted average remaining lease term at September 30, 2023 and December 31, 2022 was 4.6 years and 5.2 years, respectively. The weighted average discount rate at September 30, 2023 and December 31, 2022 was 2.25% and 2.10%, respectively.
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The following table includes supplemental cash flow information for the nine months ended September 30, 2023, and September 30, 2022, and supplemental balance sheet information at September 30, 2023 and December 31, 2022 related to operating leases (in thousands):
   
Nine months Ended

September 30,
 
Supplemental cash flow information
  
2023
   
2022
 
Cash paid for amounts included in the measurement of operating lease liabilities  $6,236   $6,532 
Operating ROU assets obtained in exchange for lease liabilities  $ 1,882   $7,332 
Supplemental balance sheet information
  
September 30,

2023
   
December 31,
2022
 
Operating lease ROU assets  $27,286   $30,991 
Operating lease liabilities:    
Accrued expenses and other current liabilities  $7,409   $7,488 
Operating lease liabilities   20,197    23,974 
          
Total operating lease liabilities  $27,606   $31,462 
          
The following table summarizes maturities of operating lease liabilities at September 30, 2023 (in thousands):
Maturities of operating lease liabilities
    
2023  $1,893 
2024   7,386 
2025   5,552 
2026   4,851 
2027   4,446 
Thereafter   4,845 
     
Total lease payments   28,973 
Less imputed interest   (1,367) 
     
Total operating lease liabilities  $27,606 
     
11.
FINANCIAL INSTRUMENTS

The Company considers the recorded value of its financial assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other current liabilities, and debt to approximate the fair value of the respective assets and liabilities on the Condensed Consolidated Balance Sheets at September 30, 20172023 and December 31, 2016.

2022.

13.
12.
STOCKHOLDERS’ EQUITY

Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
   2017   2016   2017   2016 

Numerator:

        

Net income available to common shareholders

  $20,098   $7,787   $76,829   $55,217 
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Basic weighted average shares outstanding

   29,404,049    29,295,284    29,385,722    29,419,958 

Effect of dilutive securities:

        

Stock appreciation rights and options

   97,315    116,803    98,905    133,907 

Restricted stock

   76,852    104,631    78,870    81,931 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

   29,578,216    29,516,718    29,563,497    29,635,796 
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

  $0.68   $0.27   $2.61   $1.88 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

  $0.68   $0.26   $2.60   $1.86 
  

 

 

   

 

 

   

 

 

   

 

 

 

   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2023
   
2022
   
2023
   
2022
 
Numerator:        
Net income available to common shareholders  $65,266   $14,423   $183,433   $174,549 
                    
Denominator:        
Basic weighted average shares outstanding   108,583,009    110,140,496    108,707,699    112,609,684 
Effect of dilutive securities:        
Stock appreciation rights and options   80,256    85,396    72,580    101,967 
Restricted stock   39,230    74,125    49,095    76,343 
                    
Diluted weighted average shares outstanding   108,702,495    110,300,017    108,829,374    112,787,994 
                    
Basic earnings per share  $0.60   $0.13   $1.69   $1.55 
                    
Diluted earnings per share  $0.60   $0.13   $1.69   $1.55 
                    
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Diluted earnings per share is computed using the weighted average number of shares determined for the basic earnings per share computation plus the dilutive effect of common stock equivalents using the treasury stock method. The computation of diluted earnings per share excludes the following potentially dilutive securities because the effect would be anti-dilutive:

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
       2017           2016           2017           2016     

Stock appreciation rights

   17,957    —    14,156    6,174 

Restricted stock

   330    46    110    15 

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
Stock appreciation rights   86,250    47,303    95,467    41,627 
Restricted stock   —     68,008    69,764    48,552 
Stock Repurchase Programs

Program

On October 22, 2015,February 16, 2018, the Trex Board of Directors adopted a stock repurchase program of up to 3,150,00011.6 million shares of the Company’sits outstanding common stock (October 2015(Stock Repurchase Program). From January 1, 2023 through May 3, 2023, Trex did not repurchase shares of its outstanding common stock under the Stock Repurchase Program). This authorization terminated on December 31, 2016. The Company repurchased 1,578,952 shares for $53.3 million underProgram. On May 4, 2023, the October 2015 Stock Repurchase Program.

On February 16, 2017, theTrex Board of Directors authorizedadopted a commonnew stock repurchase program (2023 Stock Repurchase Program) of up to 2,960,00010.8 million shares of the Company’sits outstanding common stock, (February 2017and terminated the existing Stock Repurchase Program). AsProgram. This repurchase program has no set expiration date. During the quarterly period ended September 30, 2023, Trex did not repurchase shares of its outstanding common stock under the 2023 Stock Repurchase Program.

13.
REVENUE FROM CONTRACTS WITH CUSTOMERS
Trex Residential Products
Trex Residential principally generates revenue from the manufacture and sale of its high-performance,
low-maintenance,
eco-friendly
wood-alternative composite decking and residential railing products and accessories. Substantially all of its revenues are from contracts with customers, which are purchase orders of short-term duration of less than one year. Its customers, in turn, sell primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products. Trex Residential satisfies its performance obligations at a point in time. The shipment of each product is a separate performance obligation as the customer is able to derive benefit from each product shipped and no performance obligation remains after shipment. Upon shipment of the dateproduct, the customer obtains control over the distinct product and Trex Residential satisfies its performance obligation. Any performance obligation that remains unsatisfied at the end of this report,a reporting period is part of a contract that has an original expected duration of one year or less. Any variable consideration related to the unsatisfied performance obligation is allocated wholly to the unsatisfied performance obligation, is recognized when the product ships and the performance obligation is satisfied and is included in “Accrued expenses and other liabilities, Sales and marketing” in Note 8 to the Condensed Consolidated Financial Statements.
Trex Commercial Products
On December 30, 2022, the Company has made no repurchases undercompleted the February 2017 Stock Repurchase Program.

sale of its wholly-owned subsidiary and reportable segment, Trex Commercial. Prior to December 30, 2022, Trex Commercial generated revenue from the manufacture and sale of its modular and architectural railing and staging systems. All of its revenues were from fixed-price contracts with customers. Trex Commercial contracts had a single performance obligation as the promise to transfer the individual goods or services were not separately identifiable from other promises in the contract and was, therefore, not distinct.
For the three months and nine months ended September 30, 2023, and September 30, 2022, net sales were disaggregated in the following tables by (1) market, (2) timing of revenue recognition, and (3) type of contract. The tables also include a reconciliation of the respective disaggregated net sales with the Company’s reportable segments (in thousands).
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Three Months Ended September 30, 2023
    
   
Trex
Residential
and
Consolidated
 
Timing of Revenue Recognition and Type of Contract
  
Products transferred at a point in time and variable consideration contracts  $303,836 
     
  $303,836 
     
Three Months Ended September 30, 2022
  
Reportable Segment
 
   
Trex
Residential
   
Trex
Commercial
   
Total
 
Timing of Revenue Recognition and Type of Contract
      
Products transferred at a point in time and variable consideration contracts  $177,776   $—    $177,776 
Products transferred over time and fixed price contracts   —     10,696    10,696 
               
  $177,776   $10,696   $188,472 
               
Nine months Ended September 30, 2023
    
   
Trex
Residential
and
Consolidated
 
Timing of Revenue and Type of Contract
  
Products transferred at a point in time and variable consideration contracts  $899,092 
     
  $899,092 
     
Nine Months Ended September 30, 2022
  
Reportable Segment
 
   
Trex
Residential
   
Trex
Commercial
   
Total
 
Timing of Revenue Recognition and Type of Contract
      
Products transferred at a point in time and variable consideration contracts  $878,892   $—    $878,892 
Products transferred over time and fixed price contracts   —     35,058    35,058 
               
  $878,892   $35,058   $913,950 
               
14.
STOCK-BASED COMPENSATION

The

At the annual meeting of stockholders of the Company has one stock-based compensation plan,held on May 4, 2023, the 2014Company’s stockholders approved the Trex Company, Inc. 2023 Stock Incentive Plan (Plan),. The Company’s board of directors unanimously approved by the Company’s stockholders inPlan on April 2014.10, 2023, subject to stockholder approval. The Plan amendedamends and restatedrestates in its entirety the Trex Company, Inc. 20052014 Stock Incentive Plan.Plan (2014 Plan), which was last approved by the Company’s stockholders at the annual meeting held on April 30, 2014. The Plan, iswhich will be administered by the Compensation Committeecompensation committee of the Company’s Boardboard of Directors. Stock-based compensation is granted to officers, directors, and certain key employees in accordance with the provisions of the Plan. The Plan provides for grantsthe grant of stock options, restricted stock, restricted stock units, stock appreciation rights (SARs)and unrestricted stock, which are referred to collectively as “awards.” Awards may be granted under the Plan to officers, directors (including
non-employee
directors) and other employees of the Company or any subsidiary thereof, to any adviser, consultant or other provider of services to the Company (and any employee thereof), and unrestricted stock. Asto any other individuals who are approved by the board of September 30, 2017,directors as eligible to participate in the Plan. Only employees of the Company or any subsidiary thereof are eligible to receive incentive stock options. Subject to certain adjustments as provided in the Plan, the total aggregate number of shares of the Company’s common stock that maypermitted to be issuedgranted under the Plan is 6,420,000.

was 4,000,000 shares at the time of adoption, and as of September 30, 2023, the total number of shares available for future grants was 3,984,956.

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The following table summarizes the Company’s stock-based compensation grants for the nine months ended September 30, 2017:

   Stock Awards Granted   Weighted-Average
Grant Price
Per Share		 

Time-based restricted stock units

   36,105   $72.50 

Performance-based restricted stock units (a)

   43,307   $57.54 

Stock appreciation rights

   18,739   $70.75 

2023:
   
Stock Awards Granted
   
Weighted-Average

Grant Price

Per Share
 
Time-based restricted stock units   91,742   $58.67 
Performance-based restricted stock units (a)   96,103   $56.79 
Stock appreciation rights   51,916   $56.80 
(a)Includes 25,98685,044 of target performance-based restricted stock unit awards granted during the nine months ended September 30, 2017,2023, and adjustments of 1,071, 5,3961,413 and 10,8549,646 to grants due to the actual performance level achieved for restricted stock and restricted stock units awarded in 2014, 2015,2021 and 2016,2020, respectively.

The fair value of each SAR is estimated on the date of grant using a Black-Scholes option-pricing formula. There were no SARs issued during the nine months ended September 30, 2016. For SARs issued in the nine months ended September 30, 20172023, and September 30, 2022, the data and assumptions shown in the following table were used:

   Nine Months Ended
September 30, 2017		 

Weighted-average fair value of grants

  $27.97 

Dividend yield

   0% 

Average risk-free interest rate

   2.0% 

Expected term (years)

   5 

Expected volatility

   42.2% 

   
Nine Months Ended

September 30, 2023
  
Nine Months Ended

September 30, 2022
 
Weighted-average fair value of grants  $27.19  $33.9 
Dividend yield   0%   0% 
Average risk-free interest rate   4.0%   1.9% 
Expected term (years)   5   5 
Expected volatility   49.50%   44.85% 
The Company recognizes stock-based compensation expense ratably over the period from the grant date to the earlier of: (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For performance-based restricted stock and performance-based restricted stock units, expense is recognized ratably over the performance and vesting period of each tranche based on management’s judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. For the employee stock purchase plan, compensation expense is recognized related to the discount on purchases. Stock-based compensation expense is included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Comprehensive Income. The following table summarizes the Company’s stock-based compensation expense (in thousands):

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
   2017   2016   2017   2016 

Stock appreciation rights

  $28   $—   $220   $184 

Time-based restricted stock

   417    368    1,557    1,847 

Performance-based restricted stock

   538    450    2,044    1,680 

Employee stock purchase plan

   54    43    92    95 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $1,037   $861   $3,913   $3,806 
  

 

 

   

 

 

   

 

 

   

 

 

 

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
Stock appreciation rights  $248   $196   $660   $547 
Time-based restricted stock and restricted stock units   1,098    1,012    2,904    2,818 
Performance-based restricted stock and restricted stock units   1,425    (1,012)    3,470    (5) 
Employee stock purchase plan   50    52    350    171 
                    
Total stock-based compensation  $2,821   $248   $7,384   $3,531 
                    
Total unrecognized compensation cost related to unvested awards as of September 30, 20172023, was $4.8$12.5 million. The cost of these unvested awards is being recognized over the requisite vesting period of each award.

15.
INCOME TAXES

The Company’s effective tax rate for the nine months ended September 30, 20172023, was 25.3% and 2016 was 34.1% and 33.5%, respectively, which resulted in expense of $39.7 million and $27.9 million, respectively. The increase of 0.6% incomparable to the effective tax rate was primarily due to lower excessfor the nine months ended September 30, 2022, of 24.8%, which resulted in income tax benefits in 2017 compared to 2016. In fiscal year 2016, the Company adopted FASB ASUNo. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The new standard requires excess tax benefits on share-based awards be recognized in the tax provision insteadexpense of in equity.

$62.1 million and $57.7 million, respectively.

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During the nine months ended September 30, 20172023 and September 30, 2016,2022, the Company realized $1.4$0.4 million and $1.7$0.1 million, respectively, of excess tax benefits from stock-based awards and recorded a corresponding benefit to income tax expense.

The Company analyzes its deferred tax assets each reporting period, considering all available positive and negative evidence in determining the expected realization of those deferred tax assets. As of September 30, 2017,2023, the Company maintains a valuation allowance of $4.1$3.0 million against deferred tax assets primarily related to state tax credits it estimates will expire before they are realized.

The Company operates in multiple tax jurisdictions, and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities, and the Company accrues a liability when it believes that it is more likely than not that benefits of tax positions will not be realized. The Company believes that adequate provisions have been made for all tax returns subject to examination. As of September 30, 2017,2023, for certain tax jurisdictions tax years 20132019 through 20162022 remain subject to examination. Sales made to foreign distributors are not taxable in any foreign jurisdictionsjurisdiction as the Company does not have a taxable presence in any foreign jurisdiction.

16.
SEGMENT INFORMATION

Prior to July 31, 2017,

Through December 30, 2022, the Company operated in onetwo reportable segment.segments. On December 30, 2022, the Company completed the sale of its wholly-owned subsidiary and reportable segment, Trex Commercial. Subsequent to the acquisitionsale of certain assets and assumption of certain liabilities of SC Company on July 31, 2017,Trex Commercial, the Company operates in twoone reportable segments:

•Trex Residential Products manufactures wood-alternative decking and railing and related products marketed under the brand name Trex®. The products are sold to its distributors and two national retailers who, in turn, sell primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products.

segment, Trex Residential:
Trex Residential manufactures wood-alternative decking and residential railing and related products marketed under the brand name Trex
®
. Trex Residential products are sold to distributors and home centers for final resale primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products.
Trex Commercial Products designs, engineers,designed, engineered, and marketsmarketed modular and architectural railing systems and solutionsstaging systems for the commercial and multifamily markets, and staging, acoustical and seating systems for commercial markets,multi-family market, including sports stadiums and performing arts venues. The segment’sTrex Commercial products are sold throughwere marketed to architects, specifiers, contractors, and others doing business within the segment’s commercial and multi-family market.

The Company’s operatingreportable segments have beenare determined in accordance with its internal management structure, which, is organizedthrough December 30, 2022, was based on residential and commercial sales activities and, subsequent to December 30, 2022, is based on its residential sales activities. The Company evaluates performance of each segment primarily based on net sales and earnings before interest, income taxes, depreciation and amortization (EBITDA). The Company uses net sales to assess performance and allocate resources as this measure represents the amount of business the segment engaged in during a given period of time, is an indicator of market growth and acceptance of segment products and represents the segment’s customers’ spending habits along with the amount of product the segment sells relative to its competitors. The Company uses EBITDA to assess performance and allocate resources because it believes that EBITDA facilitates performance comparison between the segments by eliminating interest, income taxes, and depreciation and amortization charges to income. The below segment data for the three months and nine months ended September 30, 2017,2023 and September 30, 2022 includes data for Trex Residential Products for the nine-month period and dataits reportable segments (in thousands):
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Segment Data:
   
Three Months

Ended

September 30, 2023
   
Three Months Ended September 30, 2022
 
   
Trex Residential
and Consolidated
   
Trex
Residential
   
Trex
Commercial
   
Consolidated
 
Net sales  $303,836   $177,776   $10,696   $188,472 
Net Income (loss)  $65,266   $15,287   $(864)   $14,423 
EBITDA  $99,359   $31,692   $(876)   $30,816 
Depreciation and amortization  $12,996   $11,194   $271   $11,465 
Income tax expense (benefit)  $21,831   $5,211   $(283)   $4,928 
Capital expenditures  $30,563   $41,403   $154   $41,557 
Total assets  $996,812   $802,926   $38,972   $841,898 
Reconciliation of Net Income to EBITDA:
   
Three Months

Ended

September 30, 2023
  
Three Months Ended September 30, 2022
 
   
Trex Residential
and Consolidated
  
Trex
Residential
   
Trex
Commercial
  
Consolidated
 
Net Income (loss)  $65,266  $15,287   $(864)  $14,423 
Interest (income), net   (734)   —     —    —  
Income tax expense (benefit)   21,831   5,211    (283)   4,928 
Depreciation and amortization   12,996   11,194       271   11,465 
                  
EBITDA  $ 99,359  $ 31,692   $(876)  $ 30,816 
                  
Segment Data:
   
Nine months

Ended

September 30, 2023
   
Nine months Ended September 30, 2022
 
   
Trex Residential
and Consolidated
   
Trex
Residential
   
Trex
Commercial
   
Consolidated
 
Net sales  $899,092   $878,892   $35,058   $913,950 
Net Income (loss)  $183,433   $176,939   $(2,390)   $174,549 
EBITDA  $285,271   $267,725   $(2,344)   $265,381 
Depreciation and amortization  $37,194   $32,435   $835   $33,270 
Income tax expense (benefit)  $62,089   $58,454   $(789)   $57,665 
Capital expenditures  $112,920   $107,937   $226   $108,163 
Total assets  $996,812   $802,926   $38,972   $841,898 
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Table of Contents
Reconciliation of Net Income to EBITDA:
   
Nine months
Ended

September 30, 2023
   
Nine months Ended September 30, 2022
 
   
Trex Residential
and Consolidated
   
Trex
Residential
   
Trex
Commercial
   
Consolidated
 
Net Income (loss)  $183,433   $176,939   $(2,390)   $174,549 
Interest expense (income), net   2,555    (103)    —     (103) 
Income tax expense (benefit)   62,089    58,454    (789)    57,665 
Depreciation and amortization   37,194    32,435    835    33,270 
                    
EBITDA  $285,271   $267,725   $(2,344)   $265,381 
                    
17.
SEASONALITY
The operating results for Trex Commercial Products from the date of the acquisition of SC Company through September 30, 2017 (in thousands):

   Nine Months Ended September 30, 2017 
   Residential   Commercial   Total 

Net sales

  $433,790   $9,151   $442,941 

Net income (loss)

  $76,904   $(75)   $76,829 

EBITDA

  $128,221   $806   $129,027 

Depreciation and amortization

  $11,087   $881   $11,968 

Income tax expense

  $39,715   $—   $39,715 

Capital expenditures

  $11,068   $40   $11,108 

Total assets

  $232,663   $78,533 �� $311,196 

Reconciliation of net income to EBITDA:

   Nine Months Ended September 30, 2017 
   Residential   Commercial   Total 

Net income (loss)

  $76,904   $(75)   $76,829 

Interest

   515    —    515 

Taxes

   39,715    —    39,715 

Depreciation and amortization

   11,087    881    11,968 
  

 

 

   

 

 

   

 

 

 

EBITDA

  $128,221   $806   $129,027 
  

 

 

   

 

 

   

 

 

 
   Three Months Ended September 30, 2017 
   Residential   Commercial   Total 

Net sales

  $131,043   $9,151   $140,194 

Net income (loss)

  $20,173   $(75)   $20,098 

EBITDA

  $34,079   $806   $34,885 

Depreciation and amortization

  $3,639   $881   $4,520 

Income tax expense

  $10,208   $—   $10,208 

Capital expenditures

  $3,943   $40   $3,983 

Total assets

  $232,663   $78,533   $311,196 

Reconciliation of net income to EBITDA:

   Three Months Ended September 30, 2017 
   Residential   Commercial   Total 

Net income (loss)

  $20,173   $(75)   $20,098 

Interest

   59    —    59 

Taxes

   10,208    —    10,208 

Depreciation and amortization

   3,639    881    4,520 
  

 

 

   

 

 

   

 

 

 

EBITDA

  $34,079   $806   $34,885 
  

 

 

   

 

 

   

 

 

 

17.SEASONALITY

The Company’s operating resultsResidential have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift demand for Trexits products to a later period. As part of its normal business practice and consistent with industry practice, the CompanyTrex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of the Company’sits product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs.

18.
COMMITMENTS AND CONTINGENCIES

Contract Termination Costs

The Company leases 55,047 square feet of office and storage space that it does not occupy, but has sublet all of the office space for the remainder of the term of its lease obligation, which ends June 30, 2019. The Company estimates that the future sublease receipts will be less than the remaining minimum lease payment obligations under its lease and has recorded a liability for the present value of the expected shortfall.

As of September 30, 2017, minimum payments remaining under the Company’s lease relating to its reconsidered corporate relocation over the years ending December 31, 2017, 2018, and 2019 are $0.5 million, $2.0 million and $1.0 million, respectively. Net minimum receipts remaining under the Company’s existing subleases over the years ending December 31, 2017, 2018 and 2019 are $0.3 million, $1.3 million and $0.7 million, respectively.

The following table provides information about the Company’s liability related to the lease (in thousands):

   2017   2016 

Beginning balance, January 1

  $1,475   $2,106 

Net rental payments

   (430)    (536) 

Accretion of discount

   78    113 

Decrease in net estimated contract termination costs

   (23)    (85) 
  

 

 

   

 

 

 

Ending balance, September 30

  $1,100   $1,598 
  

 

 

   

 

 

 

Product Warranty

The Company warrants that for the applicable warranty period its deckingTrex Residential products, when properly installed, used and residential railing productsmaintained, will be free from material defects in workmanship and materials and its decking, cladding, fascia and railing products will not split, splinter, rot or suffer structural damage from termites or fungal decay.
Products sold on or after January 1, 2023: The warranty period for residential use is 50 years for Transcend
®
decking, 35 years for Select
®
decking and Universal Fascia, and 25 years for Enhance
®
decking and Transcend, Select, Enhance and Signature
®
railing. The warranty periods ranging fromperiod for commercial use is 10 years, excluding Signature railing and Transcend cladding, which each have a warranty period of 25 years. The Company further warrants that Trex Transcend, Trex Enhance and Trex Select decking and cladding and Universal Fascia products will not fade in color from light and weathering exposure more than a certain amount and will be resistant to 25 years, depending onpermanent staining from food and beverage substances or mold and mildew, provided the product and its use.stain is cleaned within seven days of appearance, for the warranty period referred to above. If there is a breach of such warranties, the Company has an obligation either to replace the defective product or refund the purchase price.
Products sold prior to January 1, 2023: The warranty period is 25 years for residential use and 10 years for commercial use. With respect to Trex Signature railing, the warranty period is 25 years for both residential and commercial use. The Company further warrants that Trex Transcend, Trex Enhance, Trex Select and Universal Fascia products will not fade in color more than a certain amount and will be resistant to permanent staining from food substances or mold, provided the stain is cleaned within seven days of appearance, for the warranty period referred to above. If there is a breach of such warranties, the company has an obligation either to replace the defective product or refund the purchase price.
Trex Residential continues to receive and settle claims for decking products manufactured at its Nevada facility prior to 2007 that exhibit surface flaking and maintains a warranty reserve to provide for the settlement of these claims. Estimating the warranty reserve for surface flaking claims requires management to estimate (1) the number of claims to be settled with payment and (2) the average cost to settle each claim.

To estimate the number of claims to be settled with payment, the Company utilizes actuarial techniques to quantify both the expected numberdetermine a reasonable possible range of claims to be received and the percentage of those claims that will ultimately require payment (collectively, elements). Estimates for these elements are quantified using a range of assumptions derived from claim count history and the identification of factors influencing the claim counts. The numbercounts to determine its best estimate of future claims received has declined each year since peaking in 2009, although the rate of decline has decelerated in recent years. Additionally, events, such as the 2009 settlement offor which to record a class action lawsuit covering the surface

defect and communications by the Company in 2013 informing homeowners of potential hazards associated with products exhibiting surface flaking that are not timely replaced, have obscured observable trends in historical claims activity.related liability. The cost per claim varies due to a number of factors, including the size of affected decks, the availability and type of replacement material used, the cost of production of replacement material and the method of claim settlement.

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Table of Contents
The Company monitors surface flaking claims activity each quarter for indications that its estimates require revision. Typically, a majority of surface flaking claims received in a year are received during the summer outdoor season, which spans the second and third quarters. It has been the Company’s practice to utilize the actuarial techniques discussed above during the third quarter, after a significant portion of all claims has been received for the fiscal year and variances to annual claims expectations are more meaningful.
Average cost per claim experienced in the nine months ended September 30, 2023 was lower than that experienced in the nine months ended September 30, 2022, which was elevated due to the closure of three large claims, and lower than the Company’s expectations for 2023. The number of incoming claims received in the nine months ended September 30, 2023 was lower than the number of claims received in the nine months ended September 30, 2017 was2022, and lower than claims received in the nine months ended September 30, 2016, continuing the historical year-over-year decline in incoming claims, and consistent with the Company’s expectations. The average settlement cost per claim experienced in the nine months ended September 30, 2017 was lower than the average settlement cost per claim experienced during the nine months ended September 30, 2016 and consistent with the Company’s expectations for 2017.2023. After evaluating the declining trend in incoming claims in its actuarial analysis, the Company decreased its estimate of the number of future claims to be settled with payment. As a result of the decrease in estimated future claims, in the three-month period ended September 30, 2023, the Company recorded a reduction of $3.8 million to its warranty reserve for the future settlement of surface flaking claims. The Company believes itsthe reserve at September 30, 20172023 is sufficient to cover future surface flaking obligations.

The Company’s analysis is based on currently known facts and a number of assumptions, as discussed above, and current expectations. Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims could cause the actual warranty liabilities to be higher or lower than those projected, which could materially affect the Company’s financial condition, results of operations or cash flows. The Company estimates that the annual number of claims received will continue to decline over time and that the average cost per claim will increase slightly, primarily due to inflation. If the level of claims received or average cost per claim differs materially from expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flows in future periods. The Company estimates that a 10% change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a $2.9$1.1 million change in the surface flaking warranty reserve.

The Company also maintains a warranty reserve for the settlement of other residential product warranty claims and records the provision at the time of product sale.
The following is a reconciliation of the Company’s residential product warranty reserve that represents amounts accrued for surface flaking claims (in thousands):

   2017   2016 

Beginning balance, January 1

  $33,847   $29,673 

Changes in estimates related topre-existing warranties

   —    9,835 

Settlements made during the period

   (4,425)    (4,188) 
  

 

 

   

 

 

 

Ending balance, September 30

  $29,422   $35,320 
  

 

 

   

 

 

 

The remainder of the Company’s warranty reserve represents amounts accrued fornon-surface flaking claims.

   
Nine months Ended September 30, 2023
 
   
Surface
Flaking
   
Other
Residential
   
Total
 
Beginning balance, January 1  $15,905   $9,694   $25,599 
Provisions (changes in estimates)   (3,800)    4,824    1,024 
Settlements made during the period   (1,522)    (2,135)    (3,657) 
               
Ending balance, September 30  $10,583   $12,383   $22,966 
               
   
Nine months Ended September 30, 2022
 
   
Surface
Flaking
   
Other
Residential
   
Total
 
Beginning balance, January 1  $18,542   $10,053   $28,595 
Provisions (changes in estimates)   —     3,098    3,098 
Settlements made during the period   (2,243)    (1,901)    (4,144) 
               
Ending balance, September 30  $16,299   $11,250   $27,549 
               
Legal Matters

The Company has lawsuits, as well as other claims, pending against it which are ordinary routine litigation and claims incidental to the business. Management has evaluated the merits of these lawsuits and claims and believes that their ultimate resolution will not have a material effect on the Company’s consolidated financial condition, results of operations, liquidity or competitive position.
Arkansas Facility
In October 2021, the Company announced plans to add a third U.S.-based Trex Residential manufacturing facility located in Little Rock, Arkansas, that will sit on approximately 300 acres of land. The development approach for the new campus will be modular and calibrated to demand trends for Trex Residential outdoor living products. Construction began on the new facility in the second quarter of 2022, and in July 2022, the Company entered into a design-build agreement. As previously announced, the Company anticipates spending approximately $400 million on the facility and the budget for the design-build agreement is contained within this amount. Construction for the new facility will be funded primarily through the Company’s ongoing cash generation or its line of credit.
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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management discussion should be read in conjunction with the Trex Company, Inc. (Company,(Trex, Company, we or our) Annual Report on Form10-K for the year ended December 31, 20162022 filed with the U.S. Securities and Exchange Commission (SEC) and the condensed consolidated financial statements and notes thereto included in Part I, Item 1. “Financial Statements” of this quarterly report.

NOTE ON FORWARD-LOOKING STATEMENTS

This management’s discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements regarding our expected financial position and operating results, our business strategy, our financing plans, forecasted demographic and economic trends relating to our industry and similar matters are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” “intend” or similar expressions. We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Our actual results could be materially different from our expectations because of various factors, including the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form10-K for the year ended December 31, 20162022 filed with the SEC. These statements are also subject to risks and uncertainties that could cause the Company’s actual operating results to differ materially. Such risks and uncertainties include, but are not limited to: the extent of market acceptance of the Company’s current and newly developed products; the costs associated with the development and launch of new products and the market acceptance of such new products; the sensitivity of the Company’s business to general economic conditions; the impact of seasonal and weather-related demand fluctuations on inventory levels in the distribution channel and sales of the Company’s products; the availability and cost of third-party transportation services for the Company’s products;products and raw materials; the Company’s ability to obtain raw materials, including scrap polyethylene, wood fiber, and other materials used in making our products, at acceptable prices; increasing inflation in the macro-economic environment; the Company’s ability to maintain product quality and product performance at an acceptable cost; the Company’s ability to increase throughput and capacity to adequately match supply with demand; the level of expenses associated with warranty claims, product replacement and consumer relations expenses related to product quality; and the highly competitive markets in which the Company operates.operates; cyber-attacks, security breaches or other security vulnerabilities; the impact of current and upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences; material adverse impacts from global public health pandemics, geopolitical conflicts; and material adverse impacts related to labor shortages or increases in labor costs.

OVERVIEW

OperationsThe following MD&A is intended to help the reader understand the operations and Products:current business environment of the Company. The MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes thereto contained in “Item 1. Condensed Consolidated Financial Statements” of this report. MD&A includes the following sections:

•

Operations and Products — a general description of our business, a brief overview of our reportable segments’ products, and a discussion of our operational highlights.

•

Highlights and Financial Performance – a summary of financial performance and highlights for the three months and nine months ended September 30, 2023, a general discussion of factors that may affect our operations, and a description of relevant financial statement line items.

•

Results of Operations — an analysis of our consolidated results of operations for the three months and nine months ended September 30, 2023 compared to three months and nine months ended September 30, 2022, respectively.

•

Liquidity and Capital Resources — an analysis of cash flows; contractual obligations, and a discussion of our capital and other cash requirements.

OPERATIONS AND PRODUCTS

Prior to December 30, 2022, the Company operated in two reportable segments, Trex Residential Products (Trex Residential), the Company’s principal business based on net sales, and Trex Commercial Products (Trex Commercial). Subsequent to December 30, 2022, the Company Inc. currently operates in two business segments:one reportable segment, Trex Residential. Refer to Note 16, Segments, in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1. Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information. The Company is focused on using renewable resources within our Trex Residential Products and Trex Commercial Products.segment.

18

Trex Residential Products is the world’s largest manufacturer of high-performance composite decking and residential railing products, which are marketed under the brand name Trex® and manufactured in the United States. WeWith more than 30 years of product experience, we offer a comprehensive set of aesthetically appealing and durable,low-maintenance product offerings in the decking, residential railing, porch, fencing trim, steel deck framing, and outdoor lighting categories. A majority of the products areeco-friendly and leverage recycled and reclaimed materials to the extent possible. Trex Residential decking is made in a proprietary process that combines reclaimed wood fibers and recycled polyethylene film.film, making Trex Residential one of the largest recyclers of plastic film in North America. In addition to resisting fading and surface staining, Trex Residential products require no sanding and sealing, resist moisture damage, provide a splinter-free surface and do not require chemical treatment against rot or insect infestation. Combined, these aspects yield significant aesthetic advantages and lower maintenance than wood decking and railing and ultimately render Trex Residential products less costly than wood over the life of the deck. Special characteristics (including resistance to splitting, the ability to bend, and ease and consistency of machining and finishing) facilitate installation, reduce contractor call-backs and afford consumers a wide range of design options. Trex Residential products are sold to distributors and two national retailers who, in turn, sellhome centers for final resale primarily to the residential market.

Trex Commercial Products is a leading national provider of custom-engineered railing systems and one of the leading suppliers of staging equipment. Trex Commercial Products designs and engineers custom railing solutions, which are prevalent in professional and collegiate sports facilities, standardized architectural and aluminum railing systems, which target commercial and high-rise applications, and portable staging equipment for the performing arts, sports, and event production and rental markets. With a team of devoted engineers, and industry-leading reputation for quality and dedication to customer service, Trex Commercial Products are sold through architects, specifiers, and contractors.

Trex Residential Products offers the following products:products through Trex Residential:

 

  

Decking and Accessories

  

Our principal decking products are Trex Transcend® Lineage™, Trex Transcend®, Trex Signature®,Trex Select®, and Trex Enhance® and. In addition, our Trex Select®.Transcend decking product can also be used as cladding. Our high-performance, low-maintenance, eco-friendly composite decking products are comprised of a blend of 95 percent recycledreclaimed wood fibers and recycled plasticpolyethylene film and feature a protective polymer shell for enhanced protection against fading, staining, mold and scratching. Trex Transcend Lineage is the next generation of design and performance in composite decking and is available in four luxurious, on-trend hues inspired by some of the most picturesque locales in the United States. Our Trex Transcend decking provides elevated aesthetics paired with the highest level of performance and is available in eight multi-tonal monochromatic classical earth tones and premium tropical colors. Trex Signature decking offers realistic woodgrain aesthetics that raises the bar for beauty, performance and sustainability and is available in two luxurious hues inspired by stunning natural settings. Trex Select decking offers the perfect pairing of price and minimal maintenance and is available in five nature-inspired earth tone colors. Our Trex Enhance boards pair the beauty of authentic wood-grain appearance with the durability of composite with minimal maintenance and the affordability of wood and is available in natural and basic colors.

We also offer accessories to our decking products. Trex Hideaway®, a self-gapping universal hidden fasteningfastener designed to give a seamless finish to every project. Trex DeckLighting™, an outdoor lighting system, is a line of energy-efficient LED dimmable deck lighting designed to use 75% less energy compared to incandescent lighting. It can be installed into the railing, stair risers or the deck itself. The line includes a post cap light, deck rail light, riser light, a soffit light and a recessed deck light. Pre-assembled stair panels that allow for grooved boards.easier installation and are designed to save time on the jobsite.

 

19

Railing

  

Our railing products are Trex Transcend Railing, Trex Select Railing, Trex Select T-Railand Trex Signature® aluminum railing. Our high-performance composite and aluminum deck railing kits and systems are sustainably manufactured, easy to install and durable. Trex railing systems are built with the same durability as Trex decking and will not rot, warp, peel or splinter and resist fading and corrosion. Trex Transcend Railing, made from approximately 40 percent recycled content, is available in the colors of Trex Transcend decking and finishes that make it appropriate for use with Trex decking products as well as other decking materials, which we believe enhances the sales prospects of our railing products. Trex Select Railing, made from approximately 40 percent recycled content, is offered in a white finish and is ideal for consumers who desire a simple clean finished look for their deck. Trex Signature®Select T-Rail, made from a minimum of 40 percent recycled materials, is available in square composite balusters in Classic White for a cohesive, coordinated look, or round aluminum balusters in Charcoal Black for a more modern contrast. Trex Signature aluminum railing, made from a minimum of 40 percent recycled content, is available in three colors and designed for consumers who want a sleek, contemporary look.

 

  
Porch

Our Trex Transcend Porch Flooring and Railing System is an integrated system of porch components and accessories.Fencing

Fencing  

Our Trex Seclusions® composite fencing product is offered through two specialty distributors. This product consists of structural posts, bottom rail,rails, pickets, top railrails and decorative post caps. The top and bottom rails of Trex fencing are designed to provide a “picture frame’ element and the deep rich colors have a matte surface to prevent harsh sunlight reflections.

We are a licensor in a number of licensing agreements with third parties to manufacture and sell products under the Trex trademark. Our licensed products are:

Trex® Outdoor Furniture™

A line of outdoor furniture products manufactured and sold by PolyWood, Inc.
Trex® RainEscape® and Trex® Protect®

An above joist deck drainage system manufactured and sold by DriDeck Enterprises, LLC. Trex Protect Joist, Beam and Rim tape is a self-adhesive butyl tape that protects wooden deck framing/substructure elements.

 

  

Steel Deck

Framing    

Trex® Pergola™		  

Our triple-coated steel deck framing system called Trex Elevations® leverages the strengthPergolas made from low maintenance cellular PVC and dimensional stability of steel to create a flat surface for our decking. Trex Elevations provides consistency and reliability that wood does not and is fire resistant.all-aluminum product, manufactured by Home & Leisure, Inc. dba Structureworks Fabrication.

 

  
Outdoor LightingTrex® Latticeworks™  

Our outdoor lighting systems are Trex DeckLighting™Outdoor lattice boards manufactured and Trex LandscapeLighting™. Trex DeckLighting is a line of energy-efficient LED dimmable deck lighting, which is designed for use on posts, floors and steps. The line includes a post cap light, deck rail light, riser light and a recessed deck light. The Trex LandscapeLighting line includes an energy-efficient well light, path light, multifunction light and spotlight.sold by Structureworks Fabrication.

 

Trex Commercial Products offers the following products:

Architectural   Railing SystemsTrex® Cornhole™  

Our architectural railing systems arepre-engineered guardrails with options to accommodate styles ranging from classicCornhole boards manufactured and elegant wood top rail combined with sleek stainless components and glass infill, to modern and minimalist stainless cable and rod infill choices.sold by IPC Global Marketing LLC.

 

  
Aluminum Railing SystemsTrex® Blade™  

Our aluminum railings are a versatile, cost-effectiveA specialty saw blade for wood-alternative composite decking manufactured andlow-maintenance choice sold by Freud America, Inc.

Trex® SpiralStairs

A staircase alternative for a variety of interioruse with all deck substructures manufactured and exterior applications that we believe blend form, functionsold by M. Cohen and style. They are often used in high-rise condominium and resort projects and offer safety and durability to stairs, public walkways and balconies. They are available in picket or glass infills with a selection of top cap styles, color finishes and mounting capabilities.Sons, Inc. dba The Iron Shop.

 

  
Custom Railing OptionsTrex® Outdoor Kitchens™  

Trex Commercial can design, engineerOutdoor kitchen cabinetry manufactured and manufacture custom railing systems tailored to the customer’s specific material, style and finish. Many railing styles are achievable, including glass, mesh, perforated railing and cable railing.

Portable Stage Platforms

Our advanced modular, lightweight custom staging systems include portable platforms, guardrails, stair units, barricades, camera platforms, VIP viewing decks, ADA infills, DJ booths, pool covers, and other custom applications. Our systems provide superior staging product solutions for facilities and venues with custom needs. Our equipment requires no tools, making it easy and efficient forset-up and take-down, and our staging products are designed to withstand the harshest of weather conditions. Our modular stages are designed to appear seamless, feel permanent, and maximize the functionality of the space.sold by Danver Stainless Outdoor Kitchens.

 

Trex Commercial designed and engineered custom solutions prevalent in professional and collegiate sports facilities, commercial and high-rise applications, performing arts, sports, and event production and rentals. Trex Commercial marketed to architects, specifiers, contractors, and building owners.

Highlights forTrex offered the three months ended Septemberfollowing products through Trex Commercial through December 30, 2017:2022:

Architectural railing systems;

Aluminum railing systems; and

Staging equipment and accessories.

20

HIGHLIGHTS AND FINANCIAL PERFORMANCE

Highlights:

 

 ◾• The acquisition of certain assets and

Trex Named a 2023 Eco Leader by Green Builder Media. Trex earned highest honors awarded by Green Builder Media in the assumption of certain liabilities of Stadium Concepts Acquisition, LLC (SC Company) on July 31, 2017, byEco Leader category. This is the Company’s newly-formed, wholly-owned subsidiary,second time Trex Commercial Products, Inc.has earned this prestigious honor having previously been recognized in 2019. Trex is the only decking brand ever to be awarded Eco Leader status, which signifies companies across the building products arena that are working to quantify ESG concepts in meaningful ways.

 

 ◾• Net sales

Trex and Keep Arkansas Beautiful Awarded “Recycling Education Program of $140.2 million for the three months endedYear.” A joint initiative by Trex Company and Keep Arkansas Beautiful was celebrated in September 30, 2017, an increaseas the “2023 Recycling Education Program of 32.0%the Year” by the Arkansas Recycling Coalition (ARC). The annual ARC Awards honors organizations that have made significant contributions to the education and advancement of waste reduction, recycling, and sustainability in Arkansas over net sales of $106.2 million for the three months ended September 30, 2016.previous year.

 

 ◾• Gross profit as a percentage of net sales, gross margin, of 39.4%

Trex Hosts Investor Day in New York. In September, Bryan Fairbanks, President and CEO laid out the company’s five-year financial targets for the three months ended September 30, 2017, an increase of 11.2% over the gross margin of 28.2% for the three months ended September 30, 2016.organic growth.

 

 ◾• Net income

Trex Launches New Community Recycling Challenge. The updated NexTrex Recycling Challenge combines the company’s award-winning community and school recycling programs and moves from competition-driven model to self-initiated challenge. Additionally, Trex has made the process easier and more equitable, so more participants have the opportunity to earn recognition and rewards for their recycling efforts. Under the new structure, any participating organization that collects at least 1,000 pounds of $20.1 million forrecycled plastic film during a 12-month period qualifies to receive a composite bench from the three months ended September 30, 2017, or $0.68 per diluted share, compared to $7.8 million, or $0.26 per diluted share, for the same period in 2016.Trex Outdoor Furniture Collection.

Business Acquisition.

•

Trex Transcend Lineage Recognized in Good Housekeeping’s Renovation Awards. Trex Transcend Lineage has been recognized in Good Housekeeping’s 2023 Home Renovation Awards in the Exterior Enhancements category. Enhancing its appeal, Trex Transcend Lineage offers the look and feel of real wood, but without the environmental impact of deforestation.

Financial Performance:

The following table presents highlights of our financial performance:

   Three Months Ended
September 30,		         
   2023   2022   $ Change   % Change 
($000s omitted, except per share data)                

Net sales

  $303,836   $188,472   $115,364    61.2% 

Gross profit

  $130,895   $46,208   $84,687    183.3% 

Net income

  $65,266   $14,423   $50,843    352.5% 

EBITDA

  $99,359   $30,816   $68,543    222.4% 

Diluted earnings per share

  $0.60   $0.13   $0.47    361.5% 

   Nine months Ended
September 30,		         
   2023   2022   $ Change   % Change 
($000s omitted, except per share data)                

Net sales

  $899,092   $913,950   $(14,858)    (1.6)% 

Gross profit

  $381,771   $338,498   $43,273    12.8% 

Net income

  $183,433   $174,549   $8,884    5.1% 

EBITDA

  $285,271   $265,381   $19,890    7.5% 

Diluted earnings per share

  $1.69   $1.55   $0.14    9.0% 

Capital expenditures. During the nine months ended September 30, 2023, our capital expenditures were $112.9 million primarily related to $65.1 million for the Arkansas manufacturing facility, $17.9 million in cost reduction initiatives, $12.2 million for our new corporate headquarters, and $9.5 million related to other capacity expansion, safety, environmental and general support.

Repurchases of common shares. During the nine months ended September 30, 2023, we repurchased 264,896 shares of our outstanding common stock under the 2023 Stock Repurchase Program.

21

RESULTS OF OPERATIONS

General. Our results of operations are affected by a number of factors, including, but not limited to, the cost to manufacture and distribute products, cost of raw materials, inflation, interest rates, consumer spending and preferences, the impact of any supply chain disruptions, economic conditions, and any adverse effects from global health pandemics and geopolitical conflicts.

Towards the end of June 2022, Trex Residential experienced a reduction in demand from its distribution partners, spurred by concerns over a potential easing in consumer demand due to rising interest rates, declining consumer sentiment and expectations of a general slowing in the economy. As a result, beginning in the third quarter of 2022 Trex Residential’s channel partners met demand partially through inventory drawdown. The drawdown negatively impacted third quarter and fourth quarter 2022 sales. In response to this changed environment, Trex Residential immediately took measures to manage a production slowdown, including labor force reductions, production organization, as well as other cost actions.

Sale of Substantially All of the Assets of Trex Commercial Products, Inc. On July 31, 2017, throughDecember 30, 2022, we completed the sale of substantially all of the assets of our wholly-owned subsidiary and reportable segment, Trex Commercial, Products, Inc., we entered into a definitive agreement with SCfor net proceeds of $7.3 million. The divestiture of Trex Commercial reflects our decision to focus on driving the most profitable growth strategy for the Company and its shareholders through the execution of our outdoor living strategy. The divestiture did not represent a strategic shift with a major effect on that date acquired certain assetsthe Company’s operations and liabilitiesfinancial results. As such, the results of SC Company for $71.8 million in cash. The purchase price is subject to adjustment pending final determinationoperations of working capital. We used cash on hand and $30.0 million from our existing revolving credit facility to acquire the business. The acquisition provides us with the opportunity to offer full service railing systemsTrex Commercial are consolidated in the growing commercialCompany’s results of operations for the three months and multi-family markets, access to a complementary product category with a track record of substantial revenue growth, the ability to achieve economies of scale around raw material procurement, and an increase in the range of products the Company may offer its core customers. The unaudited condensed consolidated financial statements include the accounts Trex Commercial Products from the date of acquisition throughnine months ended September 30, 2017.2022.

Net Sales. Net sales consist of sales, and freight, net of returns and discounts. The level of net sales is principally affected by sales volume and the prices paid for Trex products. Our branding and product differentiation strategy enables us to command premium prices. OurTrex Residential operating results have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home and commercial improvement and residential and commercial construction and can shift demand for our products to a later period.

As part of our normal business practice and consistent with industry practices,practice, we have historically provided our distributors and dealers of our Trex Residential Productsproducts incentives to build inventory levels before the start of the prime deck-building season to ensure adequate availability of our product to meet anticipated seasonal consumer demand and to enable production planning. These incentives include payment discounts, and favorable payment terms. In addition, we offerterms, price discounts, or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs. The timing of salesour incentive programs can significantly impact sales, receivables and inventory levels during the offering period. However, the timing and terms of the majority of our programs are generally consistent from year to year.

Gross Profit.Gross profit represents the difference between net sales and cost of sales. Cost of sales consists of raw materialsmaterial costs, direct labor costs, manufacturing costs, subcontract costs and freight. Raw materialsmaterial costs generally include the costs to purchase and transport reclaimed wood fiber, reclaimed polyethylene, pigmentation for coloring our products, and commodities used in the production of railing and staging. Direct labor costs include wages and benefits of personnel engaged in the manufacturing process. Manufacturing costs consist of costs of depreciation, utilities, maintenance supplies and repairs, indirect labor, including wages and benefits, and warehouse and equipment rental activities.

Product Warranty. We warrant that our Trex Residential products will be free from material defects in workmanship and materials for warranty periods ranging from 10 years to 25 years, depending on the product and its use. If there is a breach of such warranties, we have an obligation either to replace the defective product or refund the purchase price. We continue to receive and settle claims for products manufactured at our Nevada facility prior to 2007 that exhibit surface flaking and maintain a warranty reserve to provide for the settlement of these claims. The number of claims received has declined each year since peaking in 2009, although the rate of decline has decelerated in recent years. Additionally, events, such as the 2009 settlement of a class action lawsuit covering the surface defect and 2013 communications made by the Company informing homeowners of potential hazards associated with products exhibiting surface flaking that are not timely replaced, have obscured any observable trends in historical claims activity.

We monitor surface flaking claims activity each quarter for indications that our estimates require revision. Typically, a majority of surface flaking claims received in a fiscal year are received during the summer outdoor season, which spans the second and third fiscal quarters. It has been our practice to utilize actuarial techniques during the third quarter, after a significant portion of all claims has been received for the fiscal year and variances to annual claims expectations are more meaningful. Our actuarial analysis is based on currently known facts and a number of assumptions. Projecting future events such as the number of claims to be received, the

number of claims that will require payment and the average cost of claims could cause the actual warranty liabilities to be higher or lower than those projected, which could materially affect our financial condition, results of operations or cash flows. The number of claims received in the nine months ended September 30, 2017 was lower than the claims received in the nine months ended September 30, 2016, continuing the historical year-over-year decline in incoming claims, and consistent with our expectations. The average settlement cost per claim experienced in the nine months ended June 30, 2017 decreased compared to the average settlement cost per claim experienced during the nine months ended June 30, 2016, and was consistent with expectations for 2017. We believe that our reserve at September 30, 2017 is sufficient to cover future surface flaking obligations.

The following table details surface flaking claims activity related to our warranty:

   Nine Months Ended
September 30,		 
   2017   2016 

Claims open, beginning of period

   2,755    2,500 

Claims received (1)

   1,931    2,257 

Claims resolved (2)

   (2,003)    (1,774) 
  

 

 

   

 

 

 

Claims open, end of period

   2,683    2,983 
  

 

 

   

 

 

 

Average cost per claim (3)

  $2,553   $2,670 

(1)Claims received include new claims received or identified during the period.
(2)Claims resolved include all claims settled with or without payment and closed during the period.
(3)Average cost per claim represents the average settlement cost of claims closed with payment during the period.

Selling, General and Administrative Expenses.The largest component of selling, general and administrative expenses is personnel related costs, which includeincludes salaries, commissions, incentive compensation, and benefits of personnel engaged in sales and marketing, accounting, information technology, corporate operations, research and development, and other business functions. Another component of selling, general and administrative expenses is branding and other sales and marketing costs, which are used to build brand awareness. These costs consist primarily of advertising, merchandising, and other promotional costs. Other general and administrative expenses include professional fees, office occupancy costs attributable to the business functions previously referenced, and consumer relations expenses. As a percentage of net sales, selling, general and administrative expenses may vary from quarter to quarter due, in part, to the seasonality of our business.

RESULTS OF OPERATIONS

On July 31, 2017, Trex Commercial Products, our newly-formed, wholly-owned subsidiary, acquired certain assets and assumed certain liabilities of SC Company for $71.8 million in cash, subject to adjustment pending final determination of working capital at closing. The Company used cash on hand and $30.0 million of funding from its existing revolving credit facility to acquire the assets. The acquired business designs, engineers and markets modular architectural railing systems and solutions for the commercial and multifamily markets, and provides staging, acoustical and seating systems for commercial markets, including sports stadiums and performing arts venues. As a result of the purchase, we will gain access to growing commercial markets, expand our custom design and engineering capabilities, and add the contract architect and specifier communities as new channels for its products. Our consolidated results of operations include the operating results of the acquired business following the date of acquisition. Our consolidated balance sheet at September 30, 2017 includes the acquired assets and any liabilities assumed.

Below is ourthe discussion and analysis of our operating results and material changes in our operating results for the three months ended September 30, 2017 (20172023 (2023 quarter) compared to the three months ended September 30, 2016 (20162022 (2022 quarter), and for the nine months ended September 30, 2017 (20172023 (2023 nine-month period) compared to the nine months ended September 30, 2016 (20162022 (2022 nine-month period).

22

Three Months Ended September 30, 20172023 Compared To The Three Months Ended September 30, 20162022

Net Sales

   Three Months Ended September 30,   $ Change   % Change 
         2017               2016           
   (dollars in thousands) 

Total net sales

  $140,194   $106,168   $34,026    32.0% 

Residential net sales

  $131,043   $106,168   $24,875    23.4% 

Commercial net sales

  $9,151    —   $9,151    N/A 

   Three Months Ended September 30,   $ Change   % Change 
   2023   2022 
                 
   (dollars in thousands) 

Total net sales

  $ 303,836   $ 188,472   $ 115,364    61.2% 

Trex Residential net sales

  $303,836   $177,776   $126,060    70.9% 

Trex Commercial net sales

   N/A   $10,696    N/A    N/A 

Total net sales in the 2023 quarter were higher compared to net sales in the 2022 quarter resulting in an increase of $115.4 million, or 61.2%. The 32.0% increase in net sales was substantially all due to increased volume which was the result of strong secular trends in the 2017 quarter compared to the 2016 quarter was due primarily to volume growth in our Trex branded decking and railing products. The volume growth was positively impacted by continued strength in the remodeling sector, our marketing programs aimed at taking market share from wood, and the healthy demand across our full suite of outdoor living products with deckingcategory and railing products asby the major growth contributors. The remaining increase resulted from net salesnon-recurrence of our recently acquired commercial products segment for the period fromchannel inventory drawdown that occurred during the date of acquisition of July 31, 2017 through quarter end.2022 quarter.

Gross Profit

   Three Months Ended September 30,  $ Change   % Change 
         2017              2016          
   (dollars in thousands) 

Cost of sales

  $84,910  $76,223  $8,687    11.4% 

% of total net sales

   60.6%   71.8%    

Gross profit

  $55,284  $29,945  $25,339    84.6% 

Gross margin

   39.4%   28.2%    

   Three Months Ended September 30,  $ Change   % Change 
   2023  2022 
               
   (dollars in thousands) 

Cost of sales

  $ 172,941  $142,264  $ 30,677    21.6% 

% of total net sales

   56.9%   75.5%    

Gross profit

  $130,895  $46,208  $84,687    183.3% 

Gross margin

   43.1%   24.5%    

Gross profit as a percentage of net sales, gross margin, increased to 39.4%was 43.1% in the 20172023 quarter from 28.2%compared to 24.5% in the 20162022 quarter. Excluding the $3.8 million dollar benefit from a reduction of the surface flaking warranty reserve, gross margin for the 2023 quarter an improvement of 11.2%was 41.8%. Gross profitExcluding Trex Commercial, gross margin for the 2022 quarter was 25.4%. The increase in gross margin in the 20162023 quarter included a $9.8 million increasewas the result of higher volume, cost out initiatives, and positive plant performance. The 2022 quarter was negatively impacted by our channel partners inventory drawdown to the warranty reserve related to surface flaking. Excluding this charge, the 2017 quarter gross margin increased by 2.0%, reflecting a 3.1% improvement in residential through cost reduction initiatives, lower sales of excess polyethylene film, lower cost raw materialsrightsize their inventories and increased capacity utilization, partially offset by the gross margin contribution from commercial products.additional costs as we restructured our operations for reduced production levels.

Selling, General and Administrative Expenses

   Three Months Ended September 30,  $ Change   % Change 
         2017              2016          
   (dollars in thousands) 

Selling, general and administrative expenses

  $24,919  $19,379  $5,540    28.6% 

% of total net sales

   17.8%   18.3%    

The $5.5 million increase in selling,

   Three Months Ended September 30,  $ Change   % Change 
   2023  2022 
               
   (dollars in thousands) 

Selling, general and administrative expenses

  $ 44,532  $26,857  $ 17,675    65.8% 

% of total net sales

   14.7%   14.2%    

Selling, general and administrative expenses increased $17.7 million in the 20172023 quarter. The increase was primarily related to a $10.6 million increase in personnel related expenses including incentive compensation. The 2022 quarter compared to the 2016 quarter resulted primarily from an increase resulting from the SC Company acquisition and an increaseincluded a $2.9 million reduction in incentive compensation and $1.2 million related to marketing, branding and advertising spend in supportrestructuring of our market growth strategies. As a percentage of net sales, total selling, general and administrative expenses decreased by 0.5% in the 2017 quarter comparedoperations to support our channel partner inventory drawdown. Other changes to the 2016 quarter.2023 quarter included a $5.8 million increase in branding expenses and a $1.5 million increase to other expenses.

Provision for Income Taxes

   Three Months Ended September 30,  $ Change   % Change 
         2017              2016          
   (dollars in thousands) 

Provision for income taxes

  $10,208  $2,702  $7,506    278% 

Effective tax rate

   33.7%   25.8%    

   Three Months Ended September 30,  $ Change   % Change 
   2023  2022 
               
   (dollars in thousands) 

Provision for income taxes

  $ 21,831  $4,928  $ 16,903    343.0% 

Effective tax rate

   25.1%   25.5%    

The effective tax rate for the 20172023 quarter increased by 7.9% comparedof 25.1% was comparable to the effective tax rate of 25.5% for the 2016 quarter primarily due to the tax effects of higher excess tax benefits related to the settlement or vesting of restricted stock or restricted stock units recognized in income tax expense during the 2016 quarter compared to the 20172022 quarter. In 2016, we adopted Financial Accounting Standards Board Accounting Standards UpdateNo. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The standard requires that excess tax benefits of the settlement or vesting of time-based restricted stock or time-based restricted stock units and performance-based restricted stock or performance-based restricted stock units be recorded within income tax expense. Prior to adoption this amount would have been recorded as an increase in additionalpaid-in capital. As a result of adoption of the standard, the provision for income taxes for the 2016 quarter was adjusted to $2.7 million from the $3.6 million previously reported.

23

Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)1 (in(dollars in thousands)

Reconciliation of net income (GAAP) to EBITDA and EBITDA margin (non-GAAP):

 

Three Months Ended September 30

  2017
Residential		   2017
Commercial		   2017
Total		   2016
Total		 

Net income (loss)

  $20,173   $(75)   $20,098   $7,787 

Interest

   59    —    59    77 

Taxes

   10,208    —    10,208    2,702 

Depreciation and amortization

   3,639    881    4,520    3,444 
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $34,079   $806   $34,885   $14,010 
  

 

 

   

 

 

   

 

 

   

 

 

 
   Three Months
Ended
September 30,
2023		   Three Months Ended September 30, 2022 
   Trex Residential
and Consolidated		   Trex
Residential		   Trex
Commercial		   Consolidated 

Net Income (loss)

  $ 65,266   $ 15,287   $(864)   $ 14,423 

Interest (income), net

   (734)    —     —     —  

Income tax expense (benefit)

   21,831    5,211    (283)    4,928 

Depreciation and amortization

   12,996    11,194    271    11,465 
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $99,359   $31,692   $(876)   $30,816 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

   Three Months Ended September 30,   $ Change   % Change 
   2017   2016     
   (dollars in thousands) 

Total EBITDA

  $34,885   $14,010   $20,875    149% 

Residential EBITDA

  $34,079   $14,010   $20,069    143% 

Commercial EBITDA

  $806    —   $806    N/A 
   Three Months Ended September 30,   $ Change   % Change 
   2023   2022 
                 
   (dollars in thousands) 

Total EBITDA

  $ 99,359   $ 30,816   $ 68,543    222.4% 

Trex Residential EBITDA

  $99,359   $31,692   $67,667    213.5% 

Trex Commercial EBITDA

   N/A   $(876)    N/A    N/A 

The Company uses EBITDA to assess performance as it believes EBITDA facilitates performance comparison between its reportable segments by eliminating interest, taxes, depreciation and amortization charges to income. Total EBITDA increased 149%222.4% to $34.9$99.4 million for the 20172023 quarter compared to $14.0$30.8 million for the 20162022 quarter. EBITDA in the 2016 quarter included a $9.8 million increase to warranty reserve related to surface flaking. Excluding this charge, the 2017 quarterThe increase in Total EBITDA was 46.5%, with Residential EBITDA growth of 43.1%driven primarily by an increase in net sales and Commercial EBITDA contributing 3.4%. The 43.1% Residential EBITDA growth was driven by increased revenue and EBITDA margin expansion.gross profit.

Nine Months Ended September 30, 20172023 Compared To The Nine Months Ended September 30, 20162022

Net Sales

   Nine Months Ended September 30,   $ Change   % Change 
         2017               2016           
   (dollars in thousands) 

Total net sales

  $442,941   $384,294   $58,647    15.3% 

Residential net sales

  $433,790   $384,294   $49,496    12.9% 

Commercial net sales

  $9,151    —   $9,151    N/A 

The 15.3% increase in total

   Nine months Ended September 30,   $ Change   % Change 
   2023   2022 
                 
   (dollars in thousands) 

Total net sales

  $ 899,092   $ 913,950   $ (14,858)    (1.6)% 

Trex Residential net sales

  $899,092   $878,892   $20,200    2.3% 

Trex Commercial net sales

   N/A   $35,058    N/A    N/A 

Total net sales decreased by $14.9 million, or 1.6%, in the 20172023 nine-month period compared to the 20162022 nine-month periodperiod. The reduction in total net sales was the result of the divesture of Trex Commercial at the end of 2022. The $20.2 million, or 2.3%, increase in Trex Residential net sales was primarily due to volume growththe launch of our Trex branded deckingpremium performance products and railing products. Volume growth was positively impacted by continued strength intheir associated pricing designed to support the remodeling sector andhigh end of the healthy demand across our full suite of outdoor living products, which we believe resulted from our marketing programs aimed at taking market share from wood. The increase in net sales from volume growth of our decking and railing products was offset by the ongoing reduction in the sale of recycled polyethylene film.market.

Gross Profit

   Nine Months Ended September 30,  $ Change   % Change 
         2017              2016          
   (dollars in thousands) 

Cost of sales

  $250,473  $235,312  $15,161    6.4% 

% of net sales

   56.5%   61.2%    

 

1 

EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of the businessits reportable segments using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important supplemental information to investors regarding the operating performance of the Company. Total EBITDA may be considered anon-GAAP measureCompany and its reportable segments. Non-GAAP financial measures should be consideredviewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP and are not meant to be considered superior to or a substitute for net income.our GAAP results.

Gross profit

  $192,468  $148,982  $43,486    29.2% 

Gross margin

   43.5%   38.8%    
24

Gross Profit

   Nine months Ended September 30,  $ Change   % Change 
   2023  2022 
               
   (dollars in thousands) 

Cost of sales

  $ 517,321  $575,452  $ (58,131)    (10.1)% 

% of total net sales

   57.5%   63.0%    

Gross profit

  $381,771  $338,498  $43,273    12.8% 

Gross margin

   42.5%   37.0%    

Gross profit as a percentage of net sales, gross margin, increased to 43.5%was 42.5% in the 20172023 nine-month period compared to 38.8%37.0% in the 20162022 nine-month period. Excluding Trex Commercial, gross margin for the 2022 quarter was 38.1%. The increase in the 2023 nine-month period an improvementwas primarily the result of 4.7%. Gross profit in the 2016 nine-month period included a $9.8 millioncost efficiencies, positive plant performance and materials management. The increase to the warranty reserve related to surface flaking. Excluding this charge, the 2017 nine-month gross margin increased 2.2% reflecting a 2.6% improvement in residential through cost reduction initiatives, lower sales of excess polyethylene film, lower cost raw materials and increased capacity utilization,was partially offset by the gross margin contribution from commercial products.lower absorption due to reduced production and higher depreciation and utilities.

Selling, General and Administrative Expenses

   Nine Months Ended September 30,  $ Change   % Change 
   2017  2016    
   (dollars in thousands) 

Selling, general and administrative expenses

  $75,409  $64,786  $10,623    16.4% 

% of net sales

   17.0%   16.9%    

As a percentage of net sales, selling,

   Nine months Ended September 30,  $ Change   % Change 
   2023  2022 
               
   (dollars in thousands) 

Selling, general and administrative expenses

  $ 133,694  $ 106,387  $ 27,307    25.7% 

% of total net sales

   14.9%   11.6%    

Selling, general and administrative expenses increased minimally during$27.3 million in the 2017 nine-month period compared to the 20162023 nine-month period. The $10.6 million increase was primarily attributablerelated to a $3.7$19.9 million increase in marketing,personnel related expenses including incentive compensation, a $4.5 million increase in branding and advertising spend,expenses, a $1.5 million write off of research and development and other assets, $0.8$2.9 million increase in research and development as we continue to support growth,expenses and an increase resulting from the SC Company acquisition.other expenses.

Provision for Income Taxes

   Nine Months Ended September 30,  $ Change   % Change 
   2017  2016    
   (dollars in thousands) 

Provision for income taxes

  $39,715  $27,871  $11,844    42.5% 

Effective tax rate

   34.1%   33.5%    

   Nine months Ended September 30,  $ Change   % Change 
   2023  2022 
               
   (dollars in thousands) 

Provision for income taxes

  $ 62,089  $57,665  $ 4,424    7.7% 

Effective tax rate

   25.3%   24.8%    

The effective tax rate increased 0.6% duringfor the 20172023 nine-month period comparedof 25.3% was comparable to the effective tax rate duringof 24.8% for the 2016 nine-month period primarily due to the effect of lower excess tax benefits in the 2017 nine-month period compared to the 20162022 nine-month period.

Reconciliation of net income (GAAP) to EBITDA(non-GAAP):

Nine Months Ended September 30

  2017
Residential		   2017
Commercial		   2017
Total		   2016
Total		 

Net income (loss)

  $76,904   $(75)   $76,829   $55,217 

Interest

   515    —    515    1,108 

Taxes

   39,715    —    39,715    27,871 

Depreciation and amortization

   11,087    881    11,968    10,609 
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $128,221   $806   $129,027   $94,805 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (in2 (dollars in thousands)

 

   Nine Months Ended September 30,   $ Change   % Change 
   2017   2016     
   (dollars in thousands) 

Total EBITDA

  $129,027   $94,805   $34,222    36.1% 

Residential EBITDA

  $128,221   $94,805   $33,416    35.2% 

Commercial EBITDA

  $806   $—   $806    N/A 
2

EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP and are not meant to be considered superior to or a substitute for our GAAP results.

The Company uses

25

Reconciliation of net income (GAAP) to EBITDA to assess performance as it believesand EBITDA facilitates performance comparison between its reportable segments by eliminating interest, taxes, depreciation and amortization charges to income. margin (non-GAAP):

   Nine months Ended
September 30, 2023		   Nine months Ended September 30, 2022 
   Trex Residential
and Consolidated		   Trex
Residential		   Trex
Commercial		   Consolidated 

Net Income (loss)

  $183,433   $176,939   $(2,390)   $174,549 

Interest expense (income), net

   2,555    (103)    —     (103) 

Income tax expense (benefit)

   62,089    58,454    (789)    57,665 

Depreciation and amortization

   37,194    32,435    835    33,270 
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $285,271   $267,725   $(2,344)   $265,381 
  

 

 

   

 

 

   

 

 

   

 

 

 

   Nine months Ended September 30,   $ Change   % Change 
   2023   2022 
                 
   (dollars in thousands) 

Total EBITDA

  $285,271   $265,381   $19,890    7.5% 

Trex Residential EBITDA

  $285,271   $237,725   $47,546    20.0% 

Trex Commercial EBITDA

   N/A   $(2,344)    N/A    N/A 

Total EBITDA increased 36.1%7.5% to $129.0$285.3 million for the 20172023 nine-month period compared to $94.8$265.4 million for the 20162022 nine-month period. EBITDA in the 2016 nine-month period included a $9.8 million increase to warranty reserve related to surface flaking. Excluding this charge, the 2017 nine-month periodThe increase in Total EBITDA was 23.3%, with Residential EBITDA growth of 22.5% and Commercial EBITDA contributing 0.8%. The 22.5% Residential EBITDA growth was driven primarily by increased revenue and EBITDA margin expansion.an increase in gross profit.

LIQUIDITY AND CAPITAL RESOURCES

We finance operations and growth primarily with cash flows from operations, borrowings under our revolving credit facility,facilities, operating leases and normal trade credit terms from operating activities.

At As of September 30, 2017,2023 we had $25.5$4.6 million of cash and cash equivalents.

Sources and Uses of Cash.The following table summarizes our cash flows from operating, investing and financing activities (in thousands):

 

  Nine Months Ended
September 30,		   Nine Months Ended September 30, 
  2017   2016   2023   2022 

Net cash provided by operating activities

  $92,837   $83,579   $288,225   $244,393 

Net cash used in investing activities

  $(82,631)   $(4,185)    (112,920)    (108,118) 

Net cash used in financing activities

  $(3,329)   $(62,452)    (182,986)    (271,443) 
  

 

   

 

   

 

   

 

 

Net increase in cash and cash equivalents

  $6,877   $16,942 

Net decrease in cash and cash equivalents

  $(7,681)   $(135,168) 
  

 

   

 

   

 

   

 

 

Operating Activities

Net cashCash provided by operating activities was $92.8$288.2 million induring the 20172023 nine-month period compared to net cash provided by operating activitiesoperations of $83.6$244.4 million induring the 20162022 nine-month period. The netIn general, the $43.8 million increase in cash provided by operating activities reflects higher earnings and reduced investment in working capital in the 2017 nine-month period compared to2023 period. Specifically, cash provided by operating activities was impacted significantly by two offsetting factors, an increase in accounts receivable and a decrease in inventory.

The increase in accounts receivable in the 2016 nine-month2023 period was primarily due to increased sales in the three months ended September 2023 compared to sales in the three months ended September 2022, and, to a lesser extent, a result of differences in payment terms offered to customers in 2023 compared to those offered in 2022. We expect substantially all of the accounts receivables balances as of September 30, 2023 will be collected during the fourth quarter of 2023.

The effect of the increase in accounts receivable was offset, in part, by a decrease in inventory in the 2023 nine-month period compared to an increase in working capital of $12.3 million. This increase was offset by a $21.6 millioninventory in the 2022 nine-month period. The increase in net income.inventory in the 2022 period was a result of the decline in sales that occurred as our distribution partners met demand partially through inventory drawdowns. The decrease in inventory in the 2023 period reflects a return to more normal purchase patterns from our distribution partners.

26

Investing Activities

Capital expenditures in the 20172023 nine-month period were $11.1$112.9 million consisting primarily of $8.1related to $65.1 million for general plantthe Arkansas manufacturing facility, $17.9 million in cost reduction initiatives, and $2.2$12.2 million for equipmentour new corporate headquarters, and new product development. Capital expenditures in the 2016 nine-month period were $8.5$9.5 million primarily consisting of $3.3 million for the purchase of equipment, land adjacentrelated to our Winchester, Virginia manufacturing facility,other capacity expansion, safety, environmental and Trex University (ourstate-of-the-art training facility), $2.6 million for general plant cost reduction initiatives, and $2.3 million for process and productivity improvement. Also, in January 2016, the Company sold a portion of the Olive Branch, Mississippi, facility that contained the buildings for $4.2 million.

On July 31, 2017, through its newly-formed, wholly-owned subsidiary, Trex Commercial Products, the Company acquired certain assets and assumed certain liabilities of SC Company for $71.8 million in cash, subject to adjustment pending final determination of working capital at closing. The Company used cash on hand and $30 million of funding from its existing revolving credit facility to acquire the assets.support.

Financing Activities

Net cash used in financing activities was $3.3 million in the 20172023 nine-month period compared toconsisted primarily of net cash used in financing activitiesborrowings under our line of $62.5 million incredit and repurchases of our outstanding common stock.

Stock Repurchase Program. On February 16, 2018, the 2016 nine-month period. The $59.1 million decrease was primarily due to $54.7 million inTrex Board of Directors adopted a stock repurchase activity inprogram of up to 11.6 million shares of its outstanding common stock (Stock Repurchase Program). The Company has repurchased 10.1 million shares under the 2016 nine-month period.

Stock Repurchase Programs.

Program. On October 22, 2015,May 4, 2023, the Trex Board of Directors adopted a new stock repurchase program (2023 Stock Repurchase Program) of up to 3.1510.8 million shares of the Company’sits outstanding common stock, (October 2015and terminated the existing Stock Repurchase Program). This authorization terminated on December 31, 2016.Program. The Company2023 Stock Repurchase Program has no set expiration date and 264,896 shares were repurchased a total of 1,578,952 shares for $53.3 million under the October 20152023 Stock Repurchase Program.Program as of September 30, 2023.

Indebtedness on and after May 18, 2022 and prior to December 22, 2022. On February 16, 2017, the Board of Directors authorized a common stock repurchase program of up to 2.96 million shares of the Company’s outstanding common stock (February 2017 Stock Repurchase Program). As of the date of this report,May 18, 2022, the Company, has made no repurchases underas borrower; Trex Commercial, as guarantor; BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; Wells Fargo, as lender and Syndication Agent; Regions Bank, PNC Bank, National Association (PNC), and TD Bank, N.A. (TD)(each, a Lender and collectively, the February 2017 Stock Repurchase Program.

Indebtedness. Our ThirdLenders), arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner, entered into a Credit Agreement (Credit Agreement) to amend and restate the Fourth Amended and Restated Credit Agreement dated as amended, provides usof November 5, 2019.

Under the Credit Agreement, the Lenders agreed to provide the Company with revolving loan capacityone or more Revolving Loans in a collective maximum principal amount of $250 million from January 1 through June 30 of each year, and a maximum principal amount of $200 million from July 1 through December 31 of each year$400,000,000 (Loan Limit) throughout the term, which ends January 12, 2021. May 18, 2027 (Term). Included within the Loan Limit are sublimits for a Letter of Credit facility in an amount not to exceed $60,000,000; and Swing Line Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000. The Revolving Loans, the Letter of Credit facility and the Swing Line Loans are for the purpose of raising working capital and supporting general business operations.

The Credit Agreement provides the Company, in the aggregate, the ability to borrow an amount up to the Loan Limit during the Term. The Company is not obligated to borrow any amount under the Loan Limit. Within the Loan Limit, the Company may borrow, repay and reborrow at any time or from time to time while the Notes are in effect. Base Rate Loans (as defined in the Credit Agreement) under the Revolving Loans and the Swing Line Loans accrue interest at the Base Rate plus the Applicable Rate (as defined in the Credit Agreement) and Term SOFR Loans for the Revolving Loans accrue interest at the rate per annum equal to the sum of Term SOFR for such interest period plus the Applicable Rate (as defined in the Credit Agreement). The Base Rate for any day is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by BOA as its prime rate, and (c) the Term SOFR plus 1.0% subject to certain interest rate floors. Repayment of all then outstanding principal, interest, fees and costs is due at the end of the Term.

The Company and BofA Securities as a sustainability coordinator, are entitled to establish specified key performance indicators (KPIs) with respect to certain environmental, social and governance targets of the Company and its subsidiaries. The sustainability coordinator and the Company may amend the Credit Agreement for the purpose of incorporating the KPIs and other related provisions, unless the Lenders object to such amendment on or prior to the date that is ten business days after the date on which such amendment is posted for review by the Lenders. Based on the performance of the Company and its subsidiaries against the KPIs, certain adjustments (increase, decrease or no adjustment) to otherwise applicable pricing will be made; provided that the amount of such adjustments shall not exceed certain aggregate caps as in the definitive loan documentation.

Under the terms of the Security and Pledge Agreement, the Company and Trex Commercial, subject to certain permitted encumbrances, as collateral security for the above-stated loans and all other present and future indebtedness of the Company owing to the Lenders grants to BOA, as Administrative Agent for the Lenders, a continuing security interest in certain collateral described and defined in the Security and Pledge Agreement but excluding the Excluded Property (as defined in the Security and Pledge Agreement).

27

Indebtedness On and After December 22, 2022. As of December 22, 2022, the Company entered into a First Amendment to the Credit Agreement (First Amendment) by and among the Company, as borrower, the guarantors party thereto; BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; TD as lender and Syndication Agent; Regions Bank, PNC, and Wells Fargo (each, a Lender and collectively, the Lenders), arranged by BofA Securities as Sole Lead Arranger and Sole Bookrunner, amending that certain Credit Agreement dated as of May 18, 2022, by and among the Company, as borrower, the guarantors party thereto, BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer and the other lenders identified therein (as so amended, the “Credit Agreement”). The First Amendment removes Trex Commercial as a guarantor to any and all indebtedness under the Credit Agreement. As a part of the First Amendment, the Credit Agreement was amended and restated to provide for an additional Revolving B Loan (as hereinafter defined).

Under the First Amendment, the Lenders agreed to provide the Company with a Revolving B Loan consisting of one or more revolving loans in a collective maximum principal amount of $150,000,000 (Revolving B Loan Limit) throughout the term, which ends December 22, 2024 (Revolving B Loan Term). Previously, under the Credit Agreement, there was no Revolving B Loan. The First Amendment also provided that TD would serve as Syndication Agent.

As of December 22, 2022, the Credit Agreement was amended and restated to refer to this loan as the Revolving A Loan. The amended and restated Credit Agreement was made an Exhibit A to the First Amendment. All of the terms of the Credit Agreement apply to the Revolving B Loan. The Credit Agreement continues to include sublimits under the Revolving A Loan for a Letter of Credit facility in an amount not to exceed $60,000,000; and Swing Line Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000. The Revolving Loans, the Letter of Credit facility and the Swing Line Loans under Revolving A Loan are for the purpose of raising working capital and supporting general business operations.

The Notes provide the Company, in the aggregate, the ability to borrow an amount up to the Revolving A Loan Limit during the Revolving A Loan Term and Revolving B Loan Limit during the Revolving B Loan Term. The Company is not obligated to borrow any amount under the revolving loans. Within the respective loan limit, the Company may borrow, repay and reborrow at any time or from time to time while the Notes are in effect. With respect to Revolving B Loans, for any day, the rate per annum is a tiered pricing based upon the Consolidated Debt to Consolidated EBITDA Ratio. The applicable rate for Revolving B Loans that are Base Rate Loans range between 1.20% and 2.15% and the applicable rate for Revolving B Loans that are Term SOFR/Term SOFR Daily Floating Rate range between 0.20% and 1.15%.

At September 30, 2017,2023, we had no$56.5 million in outstanding indebtednessborrowings under the revolving credit facility and borrowing capacity under the facility of $200$493.5 million.

Compliance with Debt Covenants. To remainPursuant to the terms of the Credit Agreement, the Company is subject to certain loan compliance covenants. The Company was in compliance with all covenants contained within our debt agreements, we must maintain specified financial ratios based on levelsas of debt, fixed charges, and earnings (excluding extraordinary gains and extraordinarynon-cash losses) before interest, taxes, depreciation and amortization. At September 30, 2017, we were in compliance with these covenants.2023. Failure to comply with our loanthe financial covenants might cause our lenders to accelerate ourcould be considered a default of repayment obligations under our credit facility, which may be declared payable immediately based on a default.and, among other remedies, could accelerate payment of any amounts outstanding.

We believe that cash on hand, cash from operations and borrowings expected to be available under our revolving credit facilityfacilities will provide sufficient funds to fund planned capital expenditures, make scheduled principal and interest payments, fund warranty payments, and meet other cash requirements. We currently expect to fund future capital expenditures from operations and financing activities. The actual amount and timing of future capital requirements may differ materially from our estimate depending on the demand for Trex products and new market developments and opportunities.

Capital Requirements. We currently estimate that our capital expenditures In October 2021, we announced plans to add a third U.S.-based Trex Residential manufacturing facility located in 2017Little Rock, Arkansas. The new campus will sit on approximately 300 acres of land and will address increased demand for Trex Residential outdoor living products. The development approach for the new campus will be $15modular and calibrated to $20demand trends for Trex Residential outdoor living products. Construction began on the new facility in the second quarter 2022, and in July 2022, the Company entered into a design-build agreement. As previously announced, the Company anticipates spending approximately $400 million on the facility and the budget for the design-build agreement is contained within this amount. Construction for the new facility will be funded primarily through the Company’s ongoing cash generation or its line of credit.

Our capital expenditure guidance for 2023 is $145 million to $155 million. OurIn addition to the construction of our third facility located in Arkansas, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment and support systems, and acquisitions which fit outour long-term outdoor products growth strategy as we continue to evaluate opportunities that would be a good strategic fit for Trex, and return of capital to shareholders.

28

Inventory in Distribution Channels.Channels. We sell our Trex Residential decking and residential railing products through a tiered distribution system. We have over 50 distributors worldwide and two national retail merchandisers to which we sell our products. The distributors in turn sell the products to dealers and retail locations who in turn sell the products to end users. Significant increases in inventory levels in the distribution channel without a corresponding change inend-use demand could have an adverse effect on future sales. We cannot definitively determine

Product Warranty. The Company warrants that for the levelapplicable warranty period its Trex Residential products, when properly installed, used and maintained, will be free from material defects in workmanship and materials and its decking, cladding, fascia and railing products will not split, splinter, rot or suffer structural damage from termites or fungal decay.

Products sold on or after January 1, 2023: The warranty period for residential use is 50 years for Transcend® decking, 35 years for Select® decking and Universal Fascia, and 25 years for Enhance® decking and Transcend, Select, Enhance and Signature® railing. The warranty period for commercial use is 10 years, excluding Signature railing and Transcend cladding, which each have a warranty period of inventory25 years. The Company further warrants that Trex Transcend, Trex Enhance and Trex Select decking and cladding and Universal Fascia products will not fade in color from light and weathering exposure more than a certain amount and will be resistant to permanent staining from food and beverage substances or mold and mildew, provided the distribution channels at any time. We arestain is cleaned within seven days of appearance, for the warranty period referred to above. If there is a breach of such warranties, the Company has an obligation either to replace the defective product or refund the purchase price.

Products sold prior to January 1, 2023: The warranty period is 25 years for residential use and 10 years for commercial use. With respect to Trex Signature railing, the warranty period is 25 years for both residential and commercial use. The Company further warrants that Trex Transcend, Trex Enhance, Trex Select and Universal Fascia products will not awarefade in color more than a certain amount and will be resistant to permanent staining from food substances or mold, provided the stain is cleaned within seven days of significant changes inappearance, for the levelswarranty period referred to above. If there is a breach of inventory insuch warranties, the distribution channels at September 30, 2017 comparedcompany has an obligation either to inventory levels at September 30, 2016.replace the defective product or refund the purchase price.

Product Warranty. We continueTrex Residential continues to receive and settle claims related tofor decking products manufactured at ourits Nevada facility prior to 2007 that exhibit surface flaking and maintains a warranty reserve to provide for the settlement of these claims. Estimating the warranty reserve for surface flaking claims requires management to estimate (1) the number of claims to be settled with payment and (2) the average cost to settle each claim.

To estimate the number of claims to be settled with payment, the Company utilizes actuarial techniques to determine a reasonable possible range of claims to be received and the percentage of those claims that will ultimately require payment (collectively, elements). Estimates for these elements are quantified using a range of assumptions derived from claim count history and the identification of factors influencing the claim counts to determine its best estimate of future claims for which to record a related liability. The cost per claim varies due to a number of factors, including the size of affected decks, the availability and type of replacement material used, the cost of production of replacement material and the method of claim settlement.

The Company monitors surface flaking claims activity each quarter for indications that its estimates require revision. Typically, a majority of surface flaking claims received in a year are received during the summer outdoor season, which spans the second and third quarters. It has hadbeen the Company’s practice to utilize the actuarial techniques discussed above during the third quarter, after a material adverse effect on cash flow from operations,significant portion of all claims has been received for the fiscal year and regularly monitorvariances to annual claims expectations are more meaningful.

Average cost per claim experienced in the adequacynine months ended September 30, 2023 was lower than that experienced in the nine months ended September 30, 2022, which was elevated due to the closure of three large claims, and lower than the Company’s expectations for 2023. The number of incoming claims received in the nine months ended September 30, 2023 was lower than the number of claims received in the nine months ended September 30, 2022, and lower than the Company’s expectations for 2023. After evaluating the declining trend in incoming claims in its actuarial analysis, the Company decreased its estimate of the number of future claims to be settled with payment. As a result of the decrease in estimated future claims, in the three-month period ended September 30, 2023, the Company recorded a reduction of $3.8 million to its warranty reserve.

Inreserve for the 2017 nine-month period and the 2016 nine-month period we paid $4.4 million and $4.2 million, respectively, to settlefuture settlement of surface flaking claims. We estimateThe Company believes the reserve at September 30, 2023 is sufficient to cover future surface flaking obligations.

29

The Company’s analysis is based on currently known facts and a number of assumptions, as discussed above, and current expectations. Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims could cause the actual warranty liabilities to be higher or lower than those projected, which could materially affect the Company’s financial condition, results of operations or cash flows. The Company estimates that the annual number of claims received will continue to decline over time and that the average settlement cost per claim will increase slightly, primarily due to inflation. If the level of claims received or average settlement cost per claim differs materially from our expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flowflows in future periods. The Company estimates that a 10% change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a $1.1 million change in the surface flaking warranty reserve.

Business Acquisition.On July 31, 2017, throughThe Company also maintains a warranty reserve for the settlement of other residential product warranty claims and records the provision at the time of product sale.

The following table details surface flaking claims activity related to our wholly-owned subsidiary, Trex Commercial Products, Inc., we entered into a definitive agreement with SC Company and on that date acquired certain assets and liabilities of SC Company for $71.8 million in cash.warranty:

   Nine Months Ended September 30, 
   2023   2022 

Claims open, beginning of period

   1,729    1,759 

Claims received (1)

   451    507 

Claims resolved (2)

   (453)    (506) 
  

 

 

   

 

 

 

Claims open, end of period

   1,727    1,760 
  

 

 

   

 

 

 

Average cost per claim (3)

  $3,977   $5,200 

(1)

Claims received include new claims received or identified during the period.

(2)

Claims resolved include all claims settled with or without payment and closed during the period.

(3)

Average cost per claim represents the average settlement cost of claims closed with payment during the period.

Seasonality. The purchase price is subject to adjustment pending final determination of working capital. We used cash on hand and $30.0 million from our existing revolving credit facility to acquire the business.

Seasonality. Our operating results for Trex Residential have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift demand for ourits products to a later period. As part of ourits normal business practice and consistent with industry practice, we haveTrex Residential has historically offered incentive programs to ourits distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of ourits product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In addition to the critical accounting policies included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016, critical accounting policies and estimates also include the following policies subsequent to and in connection with the SC Company acquisition:

Revenue Recognition

We recognize revenue using the percentage of completion method measured by the ratio of direct costs incurred to date to estimated total costs for each contract. Contract costs include all direct material, labor, subcontract and certain indirect costs. Administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are recognized when such losses are determined. Changes in job performance, conditions and estimated profitability may result

in revisions to costs and income and are recognized in the period they are determined. Revenues recognized in excess of amounts billed are classified under current assets as costs and estimated earnings in excess of billings. Billings in excess of revenues are classified under current liabilities as billings in excess of costs and estimated earnings.

Goodwill

The Company evaluates the recoverability of goodwill in accordance with Accounting Standard Codification Topic 350, “Intangibles – Goodwill and Other,” annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. Goodwill is considered to be impaired when the net book value of the reporting unit exceeds its estimated fair value. The Company first assesses qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount to determine if it should proceed with the evaluation of goodwill for impairment. If the Company proceeds with thetwo-step impairment test, the Company first compares the fair value of the reporting unit to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and step two of the impairment analysis is performed. In step two of the analysis, an impairment loss is recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise. The Company measures fair value of the reporting unit based on a present value of future discounted cash flows and a market valuation approach.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7A of the Company’s Annual Report on Form10-K for the year ended December 31, 2016.2022. There were no material changes to the Company’s market risk exposure during the nine months ended September 30, 2017.2023.

 

Item 4.

Controls and Procedures

The Company’s management, with the participation of its President and Chief Executive Officer who is the(the Company’s principal executive officer,officer) and its Vice President andActing Chief Financial Officer who is the(the Company’s principal financial officer,officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2017. We have excluded Trex Commercial Products, Inc., our wholly-owned subsidiary which is included in our consolidated financial statements, from our assessment of internal control over financial reporting as of September 30, 2017, because it was formed to acquire certain assets and assume certain liabilities of Staging Concepts Acquisition, LLC and Stadium Consolidation, LLC in a business combination on July 31, 2017.2023. Based on this evaluation, the President and Chief Executive Officer and the Vice President andActing Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective. In addition, thereThere have been no changes in the Company’s internal control over financial reporting during the nine-monththree-month period ended September 30, 20172023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

30

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

The Company has lawsuits, as well as other claims, pending against it which are ordinary routine litigation and claims incidental to the business. Management has evaluated the merits of these lawsuits and claims and believes that their ultimate resolution will not have a material effect on the Company’s consolidated financial condition, results of operations, liquidity or competitive position.

 

Item 1A.

Risk Factors

Since December 31, 2022, there have been no material changes to the risk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. You should carefully consider the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2022 and our other filings made with the SEC. You should be aware that such risk factors and other information may not describe every risk we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table provides information relating to the purchases of our common stock during the quarterthree months ended September 30, 20172023 in accordance with Item 703 of RegulationS-K:

 

Period

  (a)
Total Number of
Shares (or Units)
Purchased (1)		   (b)
Average Price Paid
per Share (or Unit)
($)		   (c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs		  (d)
Maximum number of
Shares (or Units) that
May Yet Be
Purchased Under the
Plan or Program

July 1, 2017 – July 31, 2017

   —    —   Not applicable  Not applicable

August 1, 2017 – August 31, 2017

   918   $73.76   Not applicable  Not applicable

September 1, 2017 – September 30, 2017

   —    —   Not applicable  Not applicable
  

 

 

   

 

 

   

 

  

 

Quarter ended September 30, 2017

   918     Not applicable  
  

 

 

     

 

  

Period

  (a)
Total Number of
Shares (or Units)
Purchased (1)		   (b)
Average Price Paid
per Share (or Unit)
($)		   (c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)		   (d)
Maximum number of
Shares (or Units) that
May Yet Be
Purchased Under the
Plan or Program		 

July 1, 2023 – July 31, 2023

   —     —     —     10,535,104 

August 1, 2023 – August 31, 2023

   3,454   $75.95    —     10,535,104 

September 1, 2023 – September 30, 2023

   686   $72.75    —     10,535,104 
  

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly period ended September 30, 2022

   4,140      —    
  

 

 

     

 

 

   

 

(1)Shares

During the three months ended September 30, 2023, 4,140 shares were withheld by, or delivered to, the Company pursuant to provisions in agreements with recipients of restricted stock granted under the Company’sTrex 2014 and 2023 Stock Incentive Plan allowing the Company to withhold, or the recipient to deliver to the Company, the number of shares having the fair value equal to tax withholding due.

On May 4, 2023, the Trex Board of Directors adopted a new stock repurchase program (2023 Stock Repurchase Program) of up to 10.8 million shares of its outstanding common stock, and terminated the existing Stock Repurchase Program. The 2023 Stock Repurchase Program has no set expiration date and 264,896 shares were repurchased under the 2023 Stock Repurchase Program as of September 30, 2023.

Item 5.

Other Information

N/A

Amended and Restated By-Laws of the Company dated October 25, 2023. On October 25, 2023 the Board of Directors of the Company approved and adopted amendments to Article IV, Section 1 and Article V, Section 2.(b) of the Company’s Amended and Restated By-laws, effective immediately, to grant authority to the Chief Executive Officer to appoint officers of the Corporation at the level of Vice-President or below and to fill any vacancy among such officers, any such appointment to be reported to the Board of Directors no later than the next regular meeting of the Board of Directors after such action is taken.

31

A copy of the Amended and Restated By-Laws, as amended October 25, 2023, is attached as Exhibit 3.3 hereto and is incorporated by reference.

Appointment of Adam D. Zambanini as Executive Vice President and Chief Operating Officer. On October 25, 2023, our Board of Directors appointed Adam Zambanini to serve as our Executive Vice President and Chief Operating Officer. Mr. Zambanini, age 46, previously served as President of Trex Residential Products since July 2018. There was no change to Mr. Zambanini’s compensation, and the information related to Mr. Zambanini’s compensation set forth in our definitive proxy statement filed on Schedule 14A on March 21, 2023 is incorporated herein by reference.

Item 6.

Exhibits

The number and descriptionSee Exhibit Index at the end of the following exhibits coincide withQuarterly Report on Form 10-Q for the information required by this Item 601 of RegulationS-K:which is incorporated by reference.

 

2.1Asset Purchase Agreement by and among Trex Commercial Products, Inc., Staging Concepts Acquisition, LLC, and Stadium Consolidation, LLC. Filed as Exhibit 2.1 to the Company’s Current Report on Form8-K filed July 31, 2017 and incorporated herein by reference.
3.1Restated Certificate of Incorporation of Trex Company, Inc. (Company). Filed as Exhibit 3.1 to the Company’s Registration Statement on FormS-1 (No.333-63287) and incorporated herein by reference.
3.2Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated April  30, 2014. Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form10-Q for the quarterly period ended March 31, 2014 and incorporated herein by reference.
3.3Amended and RestatedBy-Laws of the Company. Filed as Exhibit 3.2 to the Company’s Current Report on Form8-K filed May 7, 2008 and incorporated herein by reference.
31.1Certification of Chief Executive Officer of Trex Company, Inc. pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934. Filed herewith.
31.2Certification of Chief Financial Officer of Trex Company, Inc. pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934. Filed herewith.

32

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). Furnished herewith.
101.INSXBRL Instance Document. Filed.
101.SCHXBRL Taxonomy Extension Schema Document. Filed.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document. Filed.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document. Filed.
101.LABXBRL Taxonomy Extension Label Linkbase Document. Filed.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document. Filed.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  TREX COMPANY, INC.
Date: October 30, 20172023  By: /s/ Bryan H. Fairbanks
   Bryan H. Fairbanks
   Vice President and Chief FinancialExecutive Officer
   (Duly Authorized Officer and Principal Financial Officer)Officer)

EXHIBIT INDEX

 

     

Incorporated by reference

 

Exhibit

Number

 

Description

  

Form

   

Exhibit

   

Filing Date

   

File No.

 
  3.1 Restated Certificate of Incorporation of Trex Company, Inc. dated July 28, 2021.   10-Q    3.6    August 2, 2021    001-14649 
  3.2 First Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated May 5, 2022.   10-Q    3.2    May 9, 2022    001-14649 
  3.3* Amended and Restated By-Laws of the Company dated October 25, 2023.        
 10.1** Trex Company, Inc. 2023 Stock Incentive Plan.   10-Q    10.1    May 8, 2023    001-14649 
10.2** Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors as amended on July 26, 2023.   10-Q    10.2    July 31, 2023    001-14649 
10.3** Form of Trex Company, Inc. 2023 Stock Incentive Plan Stock Appreciation Rights Agreement.   10-Q    10.3    July 31, 2023    001-14649 
10.4** Form of Trex Company, Inc. 2023 Stock Incentive Plan Time-Based Restricted Stock Unit Agreement.   10-Q    10.4    July 31, 2023    001-14649 
10.5** Form of Trex Company, Inc. 2023 Stock Incentive Plan Performance-Based Restricted Stock Unit Agreement.   10-Q    10.5    July 31, 2023    001-14649 
10.6** Form of Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors Restricted Stock Unit Agreement.   10-Q    10.6    July 31, 2023    001-14649 
10.7** Amended and Restated Severance Agreement dated July 31, 2023 by and between Trex Company, Inc. and Bryan H. Fairbanks.   10-Q    10.7    July 31, 2023    001-14649 
10.8** Form of Severance Agreement between Trex Company, Inc. and Officers other than the Chief Executive Officer.   10-Q    10.8    July 31, 2023    001-14649 
 31.1* Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.        
 31.2* Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.        
 32*** Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350).        
101.INS* Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.        
101.SCH* Inline XBRL Taxonomy Extension Schema Document.        
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document.        
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document.        
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document.        
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document.        

Incorporated by reference

Exhibit

Number

  

Exhibit Description

Form

Exhibit

Filing Date

File No.

2.1

Asset Purchase Agreement by and among Trex Commercial Products, Inc., Staging Concepts Acquisition, LLC, and Stadium Consolidation, LLC. Filed as Exhibit 2.1 to the Company’s Current Report on Form8-K filed July 31, 2017 and incorporated herein by reference.

3.1

104.1		  Restated Certificate of Incorporation of Trex Company, Inc. (Company). Filed as Exhibit 3.1 toCover Page Interactive Data File—The cover page interactive data file does not appear in the Company’s Registration Statement on FormS-1 (No.333-63287) and incorporated herein by reference.interactive data file because its XBRL tags are embedded within the inline XBRL document.

3.2

*		Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated April  30, 2014. Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form10-Q for the quarterly period ended March 31, 2014 and incorporated herein by reference.

3.3

Amended and RestatedBy-Laws of the Company. Filed as Exhibit 3.2 to the Company’s Current Report on Form8-K filed May 7, 2008 and incorporated herein by reference.

31.1

Certification of Chief Executive Officer of Trex Company, Inc. pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934. Filed herewith.

**

Management contract or compensatory plan or agreement.

31.2

***		Certification of Chief Financial Officer of Trex Company, Inc. pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934. Filed herewith.

32

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). Furnished herewith.

101.INS

XBRL Instance Document. Filed.

101.SCH

XBRL Taxonomy Extension Schema Document. Filed.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document. Filed.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document. Filed.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document. Filed.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document. Filed.